Asian stocks went up on Thursday on hopes that China would recover from the pandemic. The dollar also did well after analysts found a warning in the minutes from the last Federal Reserve policy meeting not to bet too much on rate cuts this year.
MSCI’s broadest index of Asia-Pacific shares outside of Japan went up by 1% at one point and hit its highest level in four months. It then went back down. The Nikkei rose after hitting a three-month low. Futures for both the U.S. and Europe were flat.
China has suddenly lifted its strict restrictions on travel and activities, letting the virus spread to the country’s 1.4 billion people. Many funeral homes and hospitals say they are too busy, but investors are hoping that once the infection waves pass, life and spending will go back to normal. They are looking past the most immediate problems.
“China’s reopening has a big effect… all over the world,” said Joanne Goh, an investment strategist at DBS Bank in Singapore. Not only does it increase tourism and spending, but it can also ease some of the supply-chain problems that will happen in 2022.
“There will be bumps along the way,” Goh told reporters during a talk about the future. “We’ll give it six months to get used to how things work. But we don’t believe it can be reversed.”
Overnight, China’s central bank also said it will help finance key investment projects and domestic spending more, as well as keep the real estate market stable.
Hong Kong hit its highest point in six months and was up 1% at the end of the day. E-commerce and consumer stocks were among the best performers. Hopes of a reopening have pushed the Chinese yuan to its highest level in four months and helped stocks and currencies in other parts of Asia.
On Thursday, the yuan went up about 0.2% to 6.8750.
China’s unofficial ban on Australian coal imports has been partially lifted, and the Australian dollar hit its highest level in three weeks last night, just below $0.69. It bought $0.6818 last time.
Indonesian coal exporters, who had helped fill some of the gap left by Australia’s supply block, saw their stocks go down. (SO)
Oil prices dropped sharply overnight because people were worried that the near-term outlook in China was not good and that a global slowdown would hurt demand. [O/R]
Brent crude futures stayed the same on Thursday at $78.79 a barrel after falling 1.5% on Wednesday.
RATES WARNING
The minutes from the Federal Reserve’s December meeting, which were released on Wednesday, warned against the late-year rate cuts that traders had already priced in.
The minutes showed that Fed committee members said that “unwarranted easing in financial conditions” would make it harder to get prices back to where they should be.
Vishnu Varathan, head of economics at Mizuho Bank in Singapore, said, “In Fed-speak, this is a warning to markets that being too optimistic could backfire.”
“That is, if early bets on rate cuts make the economy looser, the Fed may have to tighten even more to make up for it.”
Based on the prices of Fed Funds futures, traders think the benchmark U.S. interest rate will reach its highest point just below 5% in May or June before going down a bit in the second half of 2023.
The 10-year yield went down 11 basis points this week to 3.72%, but Treasuries still held on to their recent gains. When prices go up, yields go down.
On the currency markets, the dollar has been shaky as investors try to figure out how to deal with the Fed’s hawkish tone and the fact that China’s reopening is helping riskier currencies.
The yen stayed at 132.56 dollars per yen. This was helped by betting that Japan’s ultra-loose monetary policy will finally be tightened this year.
In Europe, the unusually warm weather has been bad for skiers but good for the euro, which is already doing well because gas prices are going down. Overnight, the price of gas in the Netherlands fell to its lowest level in 14 months, and the euro stayed at $1.0605. [FRX/]