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China and Hong Kong Stocks Plummet, Yields Soar

, March 14, 2022, 0 Comments

chinaWhile the World Health Organization debates about downgrading Covid from a pandemic, the rise China and Hong Kong cases is striking.  A lockdown in Shenzhen and restrictions in Shanghai, coupled with a record fine by PBOC officials on Tencent drove local stocks sharply lower.

China’s CSI 300 fell 3% and a measure of Chinese stocks that trade in HK plunged more than 7%.  The Hang Seng itself dropped 5%.  Covid in China and Hong Kong adds to the risk of more supply chain disruptions.  Europe’s Stoxx 600 is up about 1.6%, led by financials and industrials.  US futures are 0.5%-0.7% better.   Bond markets are sliding.  Yields are 8-10 bp higher in European.  The US 10-year Treasury yield is near 2.10%.  It rose slightly more than 25 bp last week and is up 10 basis points today.  The US 5-year yield is pushing above 2% today for the first time since May 2019.  It is the sixth consecutive advance.  The dollar is sitting at the fulcrum today.  The Scandis and Euro are advancing, while the dollar-bloc and yen are softer.  The greenback pushed above JPY117 at the end of last week and has approached JPY118 today.  Among the emerging market complex, the beleaguered central European currencies are snapping back today.  The Hungarian forint, Czech koruna, and Polish zloty are up more than 1% today.  The JP Morgan Emerging Market Index has a three-week, roughly 6.5% slide in tow.  It is up about 1.1% today.  Gold is heavy near $1960 after peaking last week around $2070.  Support is seen in the $1950-$1958 band.  April WTI is also slipping lower after meeting resistance near $110.  Last week’s low was slightly above $103.  US natgas prices are around 2.3% lower after falling 5.8% last week.  Europe’s benchmark is off 15% after plummeting more than 34% last week.  Iron ore is off 7%, falling for its fifth consecutive session.  Copper is trading lower as well.  It has fallen in five of the past six sessions.  May wheat is softer.  It fell 8.5% last week.

Asia Pacific

US National Security Adviser Sullivan is meeting with his Chinese counterpart Yang today.  The last meeting was in October.  The ostensible purpose is to exchange views on global and regional issues.   The media has played up the diplomatic language of the statement that followed last month’s meeting between Putin and Xi claiming a “friendship with no limits.”   The media wants to take it at face value, yet it knows it to be misconstrued.  Consider, for example, that media reports also reveal that Russia sells weapons to India to help it fight China.  “No limits?”  Sullivan was also clear that thus far there is no evidence that Beijing is trying to circumvent the sanctions.  That said, last week the US warned Chinese chip makers against supplying Russia with products that were subject to export controls.  Affirmation through negation.  Other US officials say that Moscow has reached out to Beijing to secure military equipment, even though part of the logistical problem Russian forces are experiencing appears to be coming from shoddy parts (e.g., tires) made in China.   Reports suggest that since doubling the yuan-rouble band to 10%, there has not been an increase in turnover.

There seems to be a debate over how much China knew of Putin’s intentions.  Some US officials seem to think China may have been aware that Putin was planning something, but may not have known the full extent.  Beijing cannot be happy with what is happening, even the European theater was need new resources that could have otherwise been used to check China in the Asia-Pacific region.  The challenge posed by higher commodities is not inflation so much in China, where the CPI is less than 1% and PPI has fallen for four consecutive months.  The challenge is growth.  The 5.5% target will be more difficult to meet.  From Beijing’s vantage point, the unprecedented swift and broad sanctions on Russia strengthens US-European ties.  Xi has been reaching out to European leaders since Russia invaded Ukraine trying to strengthen ties. At the same time, Japan, Singapore, Taiwan, and South Korea (which has a new president whose rhetoric is more confrontational to Beijing) appear on a heightened sensitivity to China’s actions in the region.  China sees a web of US relationships that are tantamount to a Pacific NATO:  5-4-3-2…Five Eyes (Australia, New Zealand, Canada, UK, and the US), the Quad (Australia, India, Japan, US), AUKUS (Australia, UK, US), several bilateral security pacts including Japan, South Korea, Philippines.

The headwinds to China’s growth (domestic challenges include the property market and the crack down on technology, and the social restrictions associated with Covid) have mounted.  The front page of China’s Securities Journal suggests the PBOC could cut rates to support the economy.  There is heightened speculation that a cut could come as early as tomorrow when the 1-year Medium-Term Lending Facility is set.  Many now look for a 10 bp cut to 2.75%.  Recall it was cut 10 bp in January, which was the first cut since the two reductions in the first four months of 2020 (cumulative 30 bp).   China’s 10-year yield fell for the third day today and near 2.76%, is the lowest in a month.  The Chinese premium over the US has narrowed to about 72 bp from over 105 bp at the start of last week.

The dollar reached almost JPY117.90 earlier today as it extends last week’s breakout. The JPY118 area offers the nearby cap, but the charts suggest scope may exist toward JPY118.60.  Initial support is seen in the JPY117.40-JPY117.50 band.  The key seems to be rising US yields more than the firmer tone in equities.  The Australian dollar reversed lower last Monday and with today’s low near $0.7235 nearly completed a (61.8%) retracement of the gains scored since the Russian invasion (~$0.7225).  The selling pressure may have burnt itself out, the Aussie needs to push above $0.7280-$0.7300 to lift the technical tone.  In a rare occurrence, the US dollar gapped higher against the Chinese yuan.  The gap appears on the weekly charts, which give it added importance. The dollar’s pre-weekend high was just shy of CNY6.34 and today’s low was slightly above CNY6.3450.   It reached nearly CNY6.3625 before steadying.  The PBOC set the dollar’s reference rate at CNY6.3506, well above the CNY6.3356 median projection in Bloomberg’s survey.  Last month’s high was a little north of CNY6.37 and the year’s high was set in early January slightly below CNY6.3850.


There were some outstanding issues between the US and Iran in resurrecting the 2015 accord, but the talks were suspended. Russia, which plays an important role here (perhaps, as one observer suggested, receiving shipment so enriched uranium from Iran), wants guarantees that US sanctions would not affect Iran’s planned economic and commercial ties.  The US refuses.  Iran’s uranium enrichment has gone forward.  Iran wants a guarantee too that the US does not leave the pact again.  Europe has been nursing the talks which the US does not participate in directly.  The failure to return to the 2015 pact would force another issue to the fore:  Iran’s advancing nuclear program.

Some suggest that Russia would not have attacked Ukraine if Kyiv has retained the nuclear weapons from the Soviet era.  Maybe.  It is worth thinking about, but nuclear powers have clashed without the resort to weapons of mass destruction (e.g., India-Pakistan, India-China).  Russia has not directly attacked a NATO member.  Russia claims that convoys carrying western military supplies are legitimate targets.  This is one scenario for the broadening of the war.  Russia’s bombardment of western Ukraine was approaching the Polish border.

Russia is threatening to arrest corporate leaders and seize assets of businesses that a critical of the war or suspending activity.  Meanwhile, there is much discussion about the nearly $120 mln in coupon payments due Wednesday.  While the indicative pricing in the credit default swaps market is consistent with an imminent default, there is a grace period that should not be forgotten.  This means that a formal default is not likely this week.

The euro initially extended its pre-weekend losses and slipped briefly below $1.09, where a 1.8 bln euro option expires today.  It has recovered to almost $1.0970. The intraday momentum indicators are stretched, and nearby resistance is seen in the $1.0980-$1.1000 band.  The pre-weekend high was close to $1.1045.  Sterling’s recent losses were extended to almost $1.30 today, but it also stabilized and returned to the $1.3060 area.  While a move above there would target $1.3100, it seems too far away given the extended intraday momentum readings.  Tomorrow the UK reports employment figures but the highlight is the BOE meeting on Thursday that is widely expected to deliver another 25 bp hike.


The focus is of course on the FOMC meeting that concludes at midweek.  However, ahead of it, there are several high-frequency economic reports.  These include the March Empire State manufacturing survey and February PPI tomorrow.  Producer price inflation accelerated, with the headline expected to reach 10%.  The Empire State manufacturing survey is forecast to have improved, but we are concerned that the magnitude of the slowdown in Q1 is still not fully appreciated.  February retail sales will be released before the FOMC meeting concludes on Wednesday.  A small gain is expected after a 3.8% surge was reported in January.

Canada reported monster jobs data ahead of the weekend. Employment jumped 336.6k, well above the 127.5k median forecast in Bloomberg’s survey.  Full-time positions alone surged 121.5k.  The unemployment rate fell one percentage point to 5.5% and the participation rate jumped to 65.4% from 65.0%.  Wages for permanent employees accelerated to 3.3% from 2.4%.  The highlight this week is the February CPI report due in midweeks.  The headline pace likely picked up to 5.5% from 5.1% and the underlying core measures also probably accelerated.

Brazil’s IPCA February IPCA inflation accelerated to 10.54% from 10.38%.  This was a little ahead of expectations.  It likely solidifies expectations for a 100 bp hike a few hours after the FOMC delivers its first hike in the middle of the week.  Mexico has a light economic calendar this week, but Banxico is likely to hike 50-75 bp next week.

The Canadian dollar is trading quietly within the pre-weekend range (~CAD1.2695-CAD1.2795).  The macro story seems mostly constructive, but the US two-year premium over Canada is a negative development.  The upticks in the US S&P 500, a proxy for risk, do not seem to be offering the Canadian dollar the support that it has in the recent past.  Initial support is seen near CAD1.2720. The greenback is testing support near MXN20.85.  The MXN20.81 area corresponds to the (50%) retracement of the dollar’s gains since the war began.  Below there, support is seen in MXN20.63-MXN20.65 band.