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China reopening hopes spur big FOMO rally

China flag with a white up arrow

Despite yesterday’s negative US finish, Asia markets bounced back strongly today on more unsubstantiated reports that the Chinese government is looking at a reopening strategy as it looks to navigate a path out of the straitjacket of its current zero-covid policy.

Europe

These reports, which still haven’t been confirmed in any official capacity, have prompted a huge relief rally in equity markets, despite concerns that any reopening is unlikely to happen in the immediate future, and the very real risk that it is merely a sucker’s rally. As we head into the winter months it seems highly improbable that China would be able to reopen its economy in any meaningful or sustainable way without triggering a more widespread outbreak of Covid infections. Notwithstanding all that, investors are piling in just in case, in a classic case of fear of missing out (FOMO). 

Further reports that China is also looking at relaxing restrictions around flight suspensions which penalised airlines that brought Covid cases into the country have also boosted airlines, as well as Rolls-Royce shares. In their Q3 numbers yesterday Rolls-Royce blamed lower than expected (large engine flying hours) EFH numbers of 65% on the various covid disruptions causing problems with air travel in the Asia region. A return to normal in Asia markets would be enormously helpful for Rolls-Royce as it navigates its way back to some form of normality.  

Whatever the merits of these reports, markets are reacting to them and surging higher, and the results are being reflected in a sharp rally in basic resource stocks, pushing up the likes of Antofagasta, Anglo American and Rio Tinto, as well as other China exposed companies with HSBC, Prudential and Standard Chartered all pushing higher.

Airbus shares are also making gains after it was reported that the company had signed a $17bn jet deal with China, helping to lift the CAC 40 in the process,

The DAX is also having a good day with German Chancellor Olaf Scholz in China on a diplomatic visit, as companies who do a lot of business there getting a lift, with Continental, Volkswagen and Mercedes all outperforming. Adidas shares have jumped sharply on reports that the head of Puma, Bjoern Gulden would be joining the company as the new CEO.  

US

US markets opened strongly higher, helped by the positive read across from Asia and European markets, while the latest US non-farm payrolls report showed that 261,000 jobs were added in October, and the September jobs number was revised up to 315,000. The strength of today’s jobs report served to highlight why Fed chairman Jay Powell was so hawkish earlier this week, although the unemployment rate did edge higher to 3.7%, as wage growth slowed to 4.7% from 5%.

Coinbase shares jumped higher after beating on subscriber numbers in its Q3 numbers which rose by more than expected to 8.5m comfortably beating forecasts of 7.8m. Total revenue fell by 55% to $590.3m as did trading volume which fell 51% to $159bn. Losses increased to $2.43c a share.

Carvana shares dropped after the online used car company reported worse than expected quarterly numbers, which rather bode ill for its sector peer Vroom who report their latest Q3 numbers next week.

China based ADR’s also saw big gains on the back of this morning’s reopening story, with the likes of Alibaba, JD.Com, Tencent, and Pinduoduo also rising sharply.

BioNTech shares have also surged after it was reported that German chancellor Olaf Scholz had agreed a deal with China to supply vaccines to all China expats. Pfizer shares have also edged higher.   

FX

The US dollar initially rallied strongly in the wake of today’s strong US payrolls report, however it soon reversed course as profit-taking kicked in after what has already been a strong week for the greenback.

The pound has rebounded modestly after the heavy declines of yesterday, although it’s still on course for a heavy weekly loss, after Bank of England chief economist Huw Pill said that the bank was trying to strike a balance between hiking rates too aggressively, without causing too much damage to the UK economy.

The problem with trying to do that, and many politicians will attest to this, is if you try and be all things to all people you usually end up pleasing neither, and that is the real risk in the Bank of England’s approach. The level of inflation is so high it’s already doing enormous damage to the UK economy, and the risk is that in trying to steer a middle ground the current high levels of inflation could well take years to come down.

The euro has also undergone a strong rebound on the back of Scholz’s China visit amidst hopes of a significant trade uplift.  

The commodity currencies of the Norwegian krone, Australian and Canadian dollar are also seeing strong gains on the back of the rebound in commodity prices.       

Commodities

Crude oil prices have surged higher on the reports out of China, and a weaker US dollar, and herein lies the risk for the global economy.

While the loosening of restrictions is likely to be a positive in the context of the untangling of supply chains, the big boost to demand from an increase in consumption of natural gas, crude oil and other commodities is likely to introduce a fresh inflationary shock to the global economy, as we head into next year. This in turn will further complicate the outlook for global central banks

Copper prices have also surged strongly on the back of China reopening narrative, pushing up to six-week highs. The weaker US dollar has pulled gold off its one-month lows, keeping support at the $1,620 level intact.

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