Appetite for Risk Sours on Covid Zero in China: Markets Wrap

(Bloomberg) — Appetite for risk taking slumped as trading got underway Monday, sending the dollar higher and US equity futures lower after China affirmed its Covid-Zero policy stance.

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All Group-of-10 currencies fell against the greenback, with notable declines in the Australian and New Zealand dollars, which are sensitive to the outlook for Chinese economic growth. The offshore yuan also weakened.

Contracts for S&P 500 and Nasdaq 100 fell while Australian shares rose after US stocks snapped a four-day slide Friday. Oil slumped.

Asian equity futures and a gauge of US-listed Chinese equities had earlier pointed to a decidedly buoyant open for markets in the region — until Chinese officials on Saturday vowed to remain “unswervingly” strict in Beijing’s approach to stamping out the coronavirus.

The jolt from China comes on top of headwinds from Federal Reserve interest-rate hikes. US data Friday — showing strong hiring and wage increases along with higher unemployment — offered a mixed picture for Fed officials debating how long to extend their campaign to curb elevated inflation.

Fed fund futures are leaning toward pricing a 50-basis-point hike in December, with the peak around 5.1% next year.

Wall Street’s fear gauge is well below the panic levels seen during the pandemic or the 2008 crisis, but volatility is very much a feature of 2022.

The advance in the dollar Monday follows its biggest drop since March 2020 on Friday in Bloomberg’s gauge of the currency. Two-year US Treasury yields, which are more sensitive to imminent policy moves, reversed course and came down on Friday.

Markets will watch the latest US inflation reading on Thursday after the core consumer price index rose more than forecast to a 40-year high in September. Even if prices begin to moderate, the CPI is far above the Fed’s comfort zone.

Sentiment was further hurt by Apple Inc. projecting lower shipments of its newest iPhones than previously expected amid the impact of China lockdowns on operations at a supplier’s factory. Meanwhile, Meta Platforms Inc. is planning to begin layoffs that will affect thousands of workers from this week, Wall Street Journal reported, citing people with knowledge of the matter.

Key events this week:

China trade, Monday
Fed officials Susan Collins, Loretta Mester and Tom Barkin speak at events, Monday
Euro zone retail sales, Tuesday
US midterm elections, Tuesday
EIA oil inventory report, Wednesday
China aggregate financing, PPI, CPI, money supply, new yuan loans, Wednesday
US wholesale inventories, MBA mortgage applications, Wednesday
Fed officials John Williams, Tom Barkin speak at events, Wednesday
US CPI, US initial jobless claims, Thursday
Fed officials Lorie Logan, Esther George, Loretta Mester speak at events, Thursday
US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures fell 0.7% as of 8:20 a.m. in Tokyo. The S&P 500 rise 1.4% on Friday
Nasdaq 100 futures fell 0.8%. The Nasdaq 100 rose 1.6%.
Australia’s S&P/ASX 200 Index rose 0.5%
Nikkei 225 futures rose 1%
Hang Seng Index futures 1.7%

Currencies

The euro fell 0.2% to $0.9939
The Japanese yen fell 0.2% to 146.89 per dollar
The offshore yuan fell 0.7% to 7.2391 per dollar
The Australian dollar fell 0.4% to $0.6444

Cryptocurrencies

Bitcoin fell 0.7% to $20,990.66
Ether fell 1.4% to $1,581.36

Bonds

Commodities

West Texas Intermediate crude fell 1.9% to $90.87 a barrel
Spot gold fell 0.3% to $1,676.51 an ounce