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 were mixed on the first trading session of the week following the long holiday weekend. The S&P 500 closed 0.4% lower and the Nasdaq underperformed to slump 1.4% on Tuesday amid pressure from tech and high-growth shares, as concerns of tighter monetary policy continued to hamper demand for rate-sensitive equities. Still, gains in retail giants and telecoms supported the Dow to close 0.1% above the flatline. In the meantime, European equities gained ground yesterday, with the Euro Stoxx 50 Index closing 0.4% higher, driven by gains in the consumer discretionary sector, on optimism about China’s reopening.

Summary

  • Asian equity markets mostly fell on Wednesday as Treasury yields surged on growing fears that China’s reopening would add inflationary pressures to the global economy. Shares in Australia, Japan, South Korea and mainland China declined. Meanwhile, Hong Kong shares rose after China removed more border restrictions with the special administrative region to boost tourism. 
  • European equity markets are expected to open above the flatline, supported by US equity futures.
  • Oil prices were higher this morning, hovering near the highest levels in over three weeks, as further easing of China’s Covid restrictions lifted the demand outlook, while Russia’s export ban on price cap users triggered supply concerns. 
  • China announced on Tuesday that it will end quarantine requirements for inbound travellers starting on the 8th January, symbolising an end to its zero-Covid policy and sparking hopes for a faster economic recovery. Health authorities also said that China’s Covid management will be downgraded to the less strict Category B from the current top-level Category A. 
  • Shares of Southwest Airlines Company declined by 6% yesterday after the US Department of Transportation said that it would examine mass flight cancellations and delays by the airline. This came amid a powerful winter storm that resulted in airlines cancelling thousands of flights over the three-day holiday weekend. The Transportation Department stated that it is “concerned by Southwest’s unacceptable rate of cancellations and delays and reports of lack of prompt customer service.” 
  • Tesla shares lost more than 11% on Tuesday after the company announced it plans to run a reduced production schedule at its Shanghai factory in January, according to a report from Reuters. 
  • Chinese electric vehicle maker Nio lowered its fourth quarter outlook for deliveries, citing supply chain disruptions stemming from Covid outbreaks. Nio now projects that it will deliver between 38,500 to 39,500 electric vehicles in the fourth quarter of 2022, down from its initial estimate of 43,000 to 48,000 vehicles. The company’s shares fell more than 8% on Tuesday.