Stocks Climb as China Turmoil Eases; Dollar Slips: Markets Wrap

(Bloomberg) — European stocks opened higher and US index futures rose, as nationwide unrest in China over Covid curbs eased, boosting sentiment for riskier assets.

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Shares rallied in Hong Kong and on the Chinese mainland as some investors speculated that the protests may hasten a shift away from Covid-Zero policies. The dollar slipped after two days of gains, while the offshore-traded Chinese yuan rallied about 1% against the greenback. Europe’s Stoxx 600 equity gauge rose 0.4%, while a rebound in energy prices lifted oil companies’ shares.

China said it would bolster vaccination among its senior citizens, a move regarded by health experts as crucial to reopening an economy stuck in an endless loop of harsh Covid Zero curbs. But it stopped short of announcing mandates that helped raise inoculation rates in other countries.

“We do not expect China policy to publicly shift away from the Zero Covid stance, however, we could see some easing of the policy privately and in localized areas,” Jefferies analyst Mohit Kumar wrote in a note. Depite Monday’s China-related setbacks, he said “markets are in a happy state and are comforted by the expected reduction in the pace of rate hikes from central banks.”

Many economists expect that Federal Reserve Chair Jerome Powell’s speech on Wednesday will cement bets that the central bank will slow its pace of rate increases next month — while reminding Americans that its fight against inflation will run into 2023.

Still, Fed officials have signaled rate hikes have further to run. St. Louis President James Bullard, for instance, warned that investors may be underestimating the chances of higher rates. His New York counterpart John Williams noted policymakers have more work to do to curb inflation, and Fed Vice Chair Lael Brainard said the string of supply shocks is keeping inflation risks elevated.

The dollar retreated against a basket of peers, while Treasury yields were little changed. Global bonds, meanwhile, joined US peers in signaling a recession, with a gauge measuring the worldwide yield curve inverting for the first time in at least two decades.

Stagflation is the key risk for the global economy in 2023, according to investors who said hopes of a rally in markets are premature following this year’s brutal selloff. Almost half of the 388 respondents to the latest MLIV Pulse survey said a scenario where growth continues to slow while inflation remains elevated will dominate globally next year.

“I think the big risk for 2023 will be economic growth, because we have had this very very rapid move up in interest rates that tends to have a lag in terms of the impact on the economy,” Charlotte Ryan, co-head of investments at CCLA, told Bloomberg Television. “I don’t think we have seen the impact of that already.”

Elsewhere in markets, oil extended a rebound from the lowest level in almost a year on speculation that the Organization of Petroleum Exporting Countries and its allies will deepen supply cuts to respond to weakening global demand.

Key events this week:

Euro area economic confidence, consumer confidence, Tuesday
US Conference Board consumer confidence, Tuesday
EIA crude oil inventory report, Wednesday
China PMI, Wednesday
Fed Chair Jerome Powell speech, Wednesday
Fed releases its Beige Book, Wednesday
US wholesale inventories, GDP, Wednesday
S&P Global PMIs, Thursday
US construction spending, consumer income, initial jobless claims, ISM Manufacturing, Thursday
BOJ’s Haruhiko Kuroda speaks, Thursday
US unemployment, nonfarm payrolls, Friday
ECB’s Christine Lagarde speaks, Friday