China eases more Covid restrictions

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities tumbled for a second day as uncertainty regarding how aggressive the Fed will remain was met with increased recession fears. The Dow Jones Industrial Average lost 1.0%, the S&P 500 fell 1.4%, and the Nasdaq Composite dropped 2.0%. Shares in Europe also fell amid a host of construction PMI data.

Summary

• Asian equity markets were mixed this morning, with gains in Hong Kong offset by losses in Australia, Japan and South Korea. Meanwhile, shares in mainland China fluctuated after the government announced a further relaxation of Covid control measures.  
• European shares are poised to rise at the open on Wednesday while US equity futures are seen flat as investors weigh economic concerns. 
• Oil prices were mixed in early Asian trade on Wednesday after falling to their lowest settlement levels this year as economic uncertainty and the prospect of higher interest rates pressured prices. 
• China eased a range of Covid restrictions on Wednesday, including allowing some people to quarantine at home rather than in centralised camps and scrapping test requirements to enter more public venues, in a sharp change in national strategy to quell public discontent and fire up the economy again. The 10 new measures include accelerating vaccination among the elderly and forbidding local officials from designating large areas, like entire housing compounds, as high-risk. The moves suggest the government is willing to tolerate higher case numbers to avoid more social and economic turmoil. 
• Exports and imports in China both shrank more than expected in November amid deteriorating global and domestic demand as well as the impact of a domestic third wave of Covid infections. Imports declined by 10.6% year-over-year (y/y) compared with market estimates of a 6.0% fall and after a 0.7% drop a month earlier. Exports plunged 8.7% y/y in November, worse than market consensus of a 3.5% drop and following a 0.3% fall a month earlier. 
• The Australian economy expanded 0.6% quarter-on-quarter (q/q) in Q3 of 2022, compared with market forecasts of 0.7% and after a 0.9% rise in Q2. This was the fourth straight quarter of growth in the economy but the softest rise in the sequence, as household consumption grew the least in a year aid intense cost pressures and rising interest rates. On a yearly basis, the economy advanced 5.9% less than consensus of 6.2%. 
• PMI data in Europe showed activity in Italy rose into expansion territory versus the prior month, while Germany, France, and the Eurozone’s activity declined month-on-month in November, remaining in contraction territory. 
• A number of US bankers yesterday sent out messages that next year’s outlook for the US economy and equities is grim. Goldman Sachs’s David Solomon cautioned that the economy faces “bumpy times ahead,” JPMorgan’s Jamie Dimon’s grimmer view indicated that this would be a “mild to hard recession,” and Morgan Stanley Wealth Management’s Lisa Shalett said corporations are facing a “rude awakening” on earnings. The messages have become increasingly dire and the red flags are being waved in the wake of wage and services data that suggested inflationary forces still grip the economy.  
• Shares of Meta Platform fell yesterday after the Wall Street Journal reported that European Union regulators have decided that the company should not require users to agree to personalised ads based on their online activity. The article notes that the decision could restrict the data that Meta can access.