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Bulls in a China shop, stocks rise ahead of the Fed

Fed chair Jay Powell

China’s pledge to keep its financial markets stable as well as draw a line under its recent interventions on various sectors saw markets in Asia take off this morning. 

Europe

For several months Chinese authorities have taken steps to crack down on certain sectors of its economy, as well as discouraging overseas listings in moves that have hammered valuations.

Today’s announcement by China’s vice premier Liu He, to call time on those policies, and be more supportive, turbocharged a sharp rise in Chinese stocks with the Hang Seng China Enterprises index closing the day 12.5% higher, while the Hang Seng posted its best day since 2008.

With Asia markets rebounding so strongly there has inevitably been a ripple out effect into European markets, however today’s gains in Europe have also been driven on optimism over peace talk progress after reports emerged that Russia had dropped its demand for Ukraine to surrender, with both said to be in the process of discussing a 15-point peace plan including a ceasefire and a Russian withdrawal if Kyiv declares neutrality. This headline saw stocks move up to session highs, and while the initial move higher proved short-lived after Kyiv came out and rejected the proposals, stocks still appear to be holding up well.

As with everything the devil will be in the detail, and while the fact that both parties are talking is a good thing, one can’t help thinking as far as Russia is concerned, they are going through the motions, while Ukraine will insist on cast-iron security guarantees of the type Russia might find difficult to live with.

The sharp turnaround seen in Chinese markets and the pledge to support them has seen the likes of Prudential and Standard Chartered, who do a lot of business in the region, outperform after some sharp declines over the past few days. 

The inability of Brent crude oil prices to rebound above $100 a barrel and slide back is also weighing on the likes of BP and Shell.

On the downside Avast shares have fallen back sharply after the Competition and Markets Authority said that it may refer Norton LifeLock’s £6bn takeover for an investigation over concerns it may limit competition in the UK market.

Also lower is BAE Systems as the more positive mood around peace talks weighs on recent gains. 

US

US markets have taken their cues from the positive session in both Asia and Europe, opening higher after February retail sales came in at 0.3%, slightly below expectations, however January was revised up to 4.9% from 3.8%.

With this afternoon’s Federal Reserve meeting looming large investors will be hoping that today’s positive mood isn’t punctured by the claws of a statement and press conference that comes in on the hawkish side.

After several days of losses, we’ve seen a strong rebound in the likes of Alibaba, JD.Com Tencent and Pinduoduo on the back of this morning’s China policy shift, with Chinese tech rallying strongly across the board. 

Starbucks shares have also enjoyed a decent lift on the announcement that its CEO Kevin Johnson is retiring and that he will be replaced by Howard Schulz as interim CEO.  

FX

The US dollar has slipped back ahead of today’s fed meeting with an expectation that they may well lean towards the dovish side given the uncertainties around the global economic outlook and the situation in Ukraine.

The risk is they could be more hawkish than expected with the dot plots specifically, and to see where the distribution of rate rises is this year, as well as next year. When you consider where we were 12 months ago the Fed didn’t have any rate rises pencilled in for this year or next year. Now we’re looking at the prospect that the US central bank could price in as many as 10. That’s quite a shift in the space of 12 months.

The euro has also benefitted from this afternoon’s story of a possible ceasefire and peace plan between Russia and Ukraine

Commodities

Brent crude oil prices have slipped back below $100 a barrel despite the prospect of a shortfall in Russian oil production. The weakness appears to be being predicated on the possibility of a nuclear deal with Iran getting agreed, after it was reported that Nazanin Zaghari-Ratcliffe had been released by Iranian authorities and was on her way back to the UK.  US crude oil inventories also showed a surprise build of 4.3m barrels against an expectation of a -1.8m draw.

Gold prices are languishing near to their March lows with little in the way of direction ahead of today’s Fed meeting.    

Volatility

Sentiment regarding the resurgent COVID situation in China is very much dominating market dynamics now and in pure volatility terms this is arguably eclipsing the ongoing crisis between Russia and Ukraine.

Single stock CFDs showing the highest levels of volatility are dominated by Hong Kong and dual-listed US-China issuers, with Pinduoduo again topping the board, recording one-day vol of 560% against a monthly print of 306%.

In terms of indices, it’s again these concerns over COVID shutdowns in China that are dominating, with the China A50 posting daily vol of 87% against a monthly reading of 46%, although a notable addition here is South Africa. The SA 40 fell sharply yesterday off the dual drivers of a strengthening rand and weaker commodity prices, lifting daily vol on the index to 75% against 41% on the month.

It's a familiar picture for commodities with lumber once again at the top of the list, but Robusta Coffee also creeps in there, with underlying prices continuing to rise and concern that blocks on Russian exports of fertilizer will maintain momentum here over the next few months. Robusta cash daily vol sat at 46% against 36% on the month.

Market reaction to the dovish RBA statement saw the Aussie Dollar fall back, driving price action for the currency. Daily vol on Aussie Dollar – Dollar advanced to 11.88% as a result, whilst in the crypto space, it’s IOTA that continues to dominate. Daily vol here moved above 800% against a monthly reading of 492%.

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