Potential relaxation of Covid-related lockdown in China may help sustain a near-term equity market counter-trend rally.

What’s happening in markets?

The U.S. equity market counter-trend short-covering rally waned as NASDAQ 100 reversed earlier gains in the last hour of trading during the day and ended 0.4% and 1.2% lower respectively.  The declines were led by techs and consumer discretionary.  Travel and casino stocks were among the largest loser.  Twitter (TWTR) plunged another 8% on continuous fear of Elon Musk walking away from the deal.  The Dow Jones Index managed to stay in the green and close little changed.  The slowdown/recession fear escalated somewhat during the day by the weak economic data from China and a surprising contraction of the Empire State (i.e. New York State) Manufacturing Index (-11.6 in May vs market expectation 15, and 24.6 in April).  Reports about reinstatement of mask weaking in the New York City also affected market sentiment.  Investors will monitor today’s U.S. Retail Sales closely to assess the state of U.S. household consumption. Bloomberg consensus survey is expecting headline retail sales to come at +1% MoM and ex-autos to come at +0.4% MoM.

Hong Kong’s Hang Seng Index (HSI.I) rallied over 2% and Hang Seng TECH Index (HSTECH.I) gained 3.8% on improvement of the Covid situation in China.  JPMorgan’s 180-degree reversal to turn overweight in Chinese internet stocks and the fact that the Chinese People’s Political Consultative Conference (CPPCC) convened to promote “the sustainable and healthy development of the digital economy” also help the market sentiment.  Alibaba (09988), Tencent (00700), Meituan (03690) and JD.COM (09618) gained about 5%.  CSI300 (000300.I) gained 0.9%, with autos, auto-related semiconductors and EV batteries led the charge higher on hope of normalization of supply chain from lockdown. 

Asia equities catching a bid on China reopening hopes. A sigh of relief in Asian equity markets as the shadow of China’s weak economic data out on Monday was erased by hopes of reopening. Japan’s Nikkei (NI225.I) and Australia’s ASX 200 was in gains of over 0.2% on Tuesday while Singapore’s STI index (ES3) gained over 0.5%. Food shares in Asia were mixed despite gains in wheat prices as India banned exports. Singapore’s Golden agri-resources was down over 3% even as Wilmar stayed neutral.

RBA opening the door for bigger rate hikes. Minutes of the Reserve Bank of Australia's May monetary policy meeting showed that members considered three options, raising the cash rate by 15 basis points, 25 basis points or 40 basis points. The 40bps rate hike was avoided considering that the board meets monthly and would have the opportunity to review the data flowing in to decide on the size of future interest rate hikes. With inflation being seen as a key concern and Q1 inflation hitting 5.1% - the fastest pace in two decades – this likely suggests that there is room for 40bps (or more) of rate hikes in the upcoming meetings.

Oil reversing gains in Asia, Agriculture prices stay supported. Oil prices made a recovery overnight as agriculture products looked set to resume their medium-term bullish trend. WTI crude oil was close to 8-week highs but reports on Iran lowering crude oil price in Asia to $4.25/bbl for June from $9.20/bbl brought it back below $114. Sentiment has improved on reports of China easing restrictions. Meanwhile, wheat prices gained further that may continue to lift soy and corn prices as well, suggesting food inflation pinch is likely to get harder especially for emerging markets.

What to consider?

Some light in the tunnel for lifting of lockdown in Chinese cities. China’s nationwide (excluding Hong Kong) new local cases fell to 1,049 (sharply lower from the April 13 high of 29,317 cases), of which 823 cases from Shanghai and 52 cases from Beijing.  Shanghai reported three consecutive days of zero community (i.e. outside of quarantine) transmission.   The municipality expects to gradually resume public transportation services from May 22.  Starting from today train services and air flights to and from other Chinese cities is gradually resuming services.  The Shanghai government expects that the lockdown will be completely lifted in June. 

AUD leads the gains in Asia. AUDUSD made its way above 0.700 early in Asia amid China reopening hopes and RBA opening the doors for jumbo rate hikes to follow the Fed, but gains did not sustain. The Japanese yen stayed in a broad consolidation below 130 but is highly prone to swings in risk sentiment. The potential for gains in yen, especially on the crosses, remains in play amid a near peaking of bond yields for now. AUDJPY is above 90 but facing a strong resistance at 91. GBPJPY has barged above 159 and EURJPY is around 135.

April U.S. retail sales are out today. Expect the positive momentum to remain in place. Several factors are pushing retail sales up: solid auto sales, significant cash savings buffers (built during the pandemic) and rising wages (though they are not keeping pace with the increases in the cost of living). In the short-term, we believe consumer spending will remain robust and the domestic economy will be in a good position.

Potential trading ideas to consider?

Industrial metals on watch as China reopens. Cyclical headwinds for industrial metals may be peaking as China hints at reopening and stimulus. Copper and aluminum still remain in a structural upcycle, with green transformation and focus on renewables suggesting demand uptrend but supply remaining tight due to lack of investment and declining ore quality.

The potential of China’s relaxation of Covid restrictions and resumption of U.S. equity market counter-trend rally may help global equity markets’ momentum to bounce further from their recent lows in near-term, despite the woes of the equity markets are yet to be over in medium-term. 

Chinese earnings on tap. While the US earnings mostly focused on cost pressures, the focus is now shifting to big China earnings. On tap today will be JD.com and Sea Ltd followed by Tencent, Trip.com, Xiaomi, and DiDi Global over the rest of the week.

Key economic releases this week:

• Tuesday: U.S. Retail Sales, U.S. Industrial Production, EU Q1 GDP
• Wednesday: U.S. Housing Starts & Building Permits; Japan GDP, EU April CPI
• Thursday: Australia employment
• Friday: Japan nationwide CPI

Key earnings release this week:

• Tuesday: Engie, Vodafone, Nibe Industrier, Sonova, Walmart, Home Depot, JD.com, Sea Ltd
• Wednesday: Tencent, Experian, Burberry, Singapore Airlines, Cisco, Lowe’s, Target, Analog Devices, TJX, Synopsys, Copart, Trip.com

• Thursday: Xiaomi, Generali, National Grid, Applied Materials, Palo Alto Networks, Ross Stores, DiDi Global
• Friday: NIO