COVID unrest in China hits risk sentiment – Daily Market Brief, November 28, 2022

Riskier assets, such as stocks, are heading lower amid rising civil unrest in China as COVID restrictions are tightened. The DAX and the CAC head lower while the safe haven dollar rises.

·         Oil falls to its lowest level in almost a year as the demand outlook deteriorates

·         AUD/USD drops 1% on China COVID news & after retail sales unexpectedly fall

·         ECB’s Christine Lagarde is due to speak later and could shed light on the future path of rate hikes

Stocks in Europe and on Wall Street experienced solid gains in a relatively quiet week last week owing to the Thanksgiving holiday. The mood was boosted by the FOMC minutes, which supported the narrative that the Federal Reserve could look to slow the pace of interest rate hikes as soon as from the December meeting.

The market mood has soured considerably as the new week kicks off amid growing unrest in China as COVID restrictions were tightened. Chinese equities tumbled in the Asian session.

Tighter lockdown restrictions and widespread protests could trigger new supply chain disruptions and bottlenecks. These supply chain issues were one of the main causes of global inflation following the pandemic. Investors are worried that just as inflation is starting to show signs of cooling, fresh restrictions could revive it. Any assets or market exposed to China is going to be affected.

Oil

Oil prices have dropped to the lowest level since December 2021 as protests escalate in China in response to the strict zero-COVID restrictions. As COVID infections continue to rise to daily record highs in China, the world’s largest oil importer, the demand outlook for oil is deteriorating. Meanwhile, on the supply side, the OPEC+ group will meet at the end of this week to discuss future output levels. The meeting comes after the oil cartel agreed to a 2 million barrel per day production cut in the October meeting. With oil prices at the lowest level in almost a year and the demand picture in China deteriorating, the group could be encouraged to cut production further.

AUD/USD

AUD/USD is falling steeply ahead to the European open, not just owing to the fallout from China’s COVID crisis but also as investors digested an unexpected decline in Australian retail sales. Sales unexpectedly declined -0.2% MoM in October as household incomes were squeezed by high inflation and rising interest rates. This is the first decline in retail sales this year as cracks appear in consumer resilience. The data supports the RBA’s recent downshift in rate hikes to 25 basis points. AUD/USD trades over 1% lower below 0.67 at the time of writing.

ECB’s Christine Lagarde

The broad risk-off mood sees European bourses heading for a weaker start. The DAX points to a 0.5% decline on the open, and the CAC is set to fall by 0.4%.

In the FX markets, the safe haven USD dollar is finding support while the pound and the euro, along with commodity currencies, are falling.

The economic calendar is quiet today. Attention will be on ECB’s President Christine Lagarde, who is due to speak. Investors will be listening closely for clues over where she sees the future path of interest rates as ECB policy makers appear split over whether to slow the pace of rate hikes or not.

Looking ahead

This week is set to be a busy week, with all eyes on the non-farm payroll report, core PCE inflation gauge, and a speech by Jerome Powell, which could fuel dovish pivot bets.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

Sources: Bloomberg, CNBC, Reuters

Original article provided by Trading Writers

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