Chinese Stocks Extend Rally Even Though Covid Infections Appear to be Spreading

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Marc Chandler
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Overview: The easing of vaccination, quarantine, and some travel protocols related to Covid in China (and Hong Kong) continues to draw funds back into Chinese stocks, wherever they trade. The Hang Seng rose 2.3% today to close the week with a nearly 6.6% advance. The index of mainland companies that trade there rose 2.5% on the day for a7.3% weekly gain. The CSI 300 of mainland shares rose 1% today and almost 3.3% for the week. Japan’s 1% gain today ensured a gain on the week, while the other large regional markets rose today to narrow the weekly loss. Europe’s Stoxx 600 is snapping a five-day drop with a modest gain of about 0.35%. US futures are trading with a slightly firmer bias. European bond yields are mostly 4-7 bp firmer, while the 10-year US Treasury is little changed to hold below 3.50%. The dollar is mostly softer against the G10 currencies. The yen and Swiss franc are the strongest, sporting gains of about 0.4%. The Canadian dollar, which has run out of favor, is off by around 0.25%. The Australian dollar and Norwegian krone are also trading to the downside. Among the emerging market complex, the South African rand (~-0.5%) and the Mexican peso (~-0.45%) are the weakest, while the South Korean won (~1.25%) is leading the advancers. Gold continues to recover from Monday’s key reversal and is pushing above the 200-day moving average (~$1792) to near $1800. January WTI is held yesterday’s low (~$71.10) and firmed a little above $72.0. Even with the Keystone Pipeline outage, it is off nearly 10% this week. US natgas, which gained around 8.8% over the past two sessions is 0.75% softer today. For the week, it is off more than 5% after falling almost 10.6% last week. Europe’s natgas benchmark is off 0.75% after yesterday’s 8.3% drop. This looks like the first week in four that it has fallen. The hope of stronger Chinese demand helped lift iron ore prices by 2.6% after a 2.8% gain yesterday. It is the sixth consecutive weekly advance. March copper is threatening to end its three-day advance. It is up less than 1% this week after last week’s 6% surge. March wheat is recovering yesterday’s modest loss. Still, it is set to close lower for the fifth consecutive week.

Asia Pacific

China's November PPI stabilized at -1.3%, the same as in October, which was a little better than expected. Mining prices were off 3.9% from a year ago, improving from -6.7% in October. Manufacturing goods prices were down 3.2% after -3.5% in October. CPI slowed to 1.6% year-over-year from 2.1% in October. That reflects a 0.2% decline on the month, the first decline since August. The key was food inflation. It was nearly halved, to 3.7% from 7.0%. Non-food prices are up 1.1% year-over-year. The core rate, excluding food and energy was unchanged at 0.6%. It is the eighth month that core prices have been below 1%. Partly this reflects weakness in demand. Service prices rose by 0.5% from a year ago. Durable goods prices are up a mere 0.1% year-over-year.

There were a record high number of Covid cases last month in China and the shift on testing will, almost by definition, reduce the number of reported cases, yet the disruption from the virus may persist. Media reports note long lines grow outside pharmacies and fever clinics. Medication and test supplies are dwindling. One report, based on data from an initial batch of testing, suggest the actual number of infections in Beijing may have been three-times has high as reported on yesterday.

Australia's government announced a 12-month cap on energy prices and will off as much as A$1.5 bln subsidies to ease the cost-of-living squeeze. The budget in October projected at least a 50% increase in electricity costs by June 2024 and a 40% increase in gas prices. The government will compensate energy producers if their production costs exceed the caps, but the measures will vary from state to state, Prime Minister Albanese announced today. The government has been negotiating for weeks on the measures, which designed not to interfere with exports. Australia is one of the largest exporters of liquified natural gas. Some industry groups warn that the price cap will adversely impact investment and future supplies. 

The dollar slipped to a four-day low near JPY135.75 earlier today. The break of JPY136 may have spurred some hedging of the $1.32 bln options expiring today struck there. The greenback recovered to almost JPY136.50 before running out of steam. The Australian dollar reached a low near $0.6670 in the middle of the week and tested $0.6800 today, where a nearly A$985 mln options will expire today. It retreated to almost a half-of-a-cent before finding a better bid in Europe. The market may give the high another other go. The greenback made a marginal new low for the week against the Chinese yuan (slightly below CNY6.9450) after gapping slightly lower. Today's high was CNY6.9625 and yesterday's low was CNY6.9648. This is the lowest the US dollar has traded since mid-September. The PBOC set the dollar's reference rate at CNY6.9588. The median projection in Bloomberg's survey was for CNY6.9611.

Europe  

The ECB is expected to announce later today the early prepayment of the Targeted Long Term Refinancing Operations (three-year loans). Recall that last month, banks offered to payback 296 bln euros, leaving about 1.8 trillion euros. The pace of the repayment may impact the ECB's discussion next week on unwinding its balance sheet. The ECB's balance sheet expanded via loans and bond purchases. The faster the loans are paid back the more the central bank can rely on it rather the more conventional QT of not reinvesting all the maturing proceeds from its bond portfolio.

It looks like the Netherlands will tighten the restrictions on ASML's ability to sell chip making equipment capable of producing 14-nanometers or more advanced to China. The most advanced commercially available chip for mass production is 5 nanometers. Samsung has indicated that it will be making 2 nanometer chips in 2025 and intends on producing 1.4 nanometer chips in 2027. The US ability to get the Dutch to comply emanates from two sources. First, the Dutch share the American (and others') concern about the giving access to the latest technologies to China given the strategic competition and arguably diverging values. The Netherlands already has some export restrictions in place. Reports suggest that since 2018, the Dutch government has prevented ASML the authority to export its modest advanced machines to China. The second source of leverage is the reported threat by US officials to ban the sale of foreign equipment that contains even the most minute amount of US technologies to China. Even though the US does not make the high-end chips, its design and other technology play a key role in the global industry. The TSMC plant being built in Arizona (~$40 bln), what the White House calls the largest foreign direct investment in US history, is going to fabricate 4-nanometer chips. When the announcement was first made in May 2020, the 7-nanometer-chip was the cutting edge of the commercially available semiconductor chips. The latest reports suggest it will be producing 3-nanometer chips in Arizona by 2026. That size chip is scheduled to be produced next year in Taiwan.

The euro traded to almost $1.0590 today, its highest level since Monday. The cap may have been provided by those defending nearly 1.8 bln euros options expiring at $1.06 today. The pullback saw new bids emerge slightly below $1.0550. The market may try again. We have noted that the $1.0610 area corresponds to the (38.2%) retracement of the euro's decline since it peaked on January 6, 2021, near $1.2350. Sterling also traded at a four-day high today, slightly above $1.2275. Monday's high, the highest since June was about $1.2345. Initial support is seen in the $1.2220-30 band and a loss of $1.22 would weaken the technical tone. 

America

The shutdown in the Keystone pipeline due to a leak in Nebraska sparked a quick but short-lived spike in WTI prices. Prices jumped more than 4% on the news from near their lowest levels of the year. January WTI rallied from around $72.30 to $75.45 on the news but within a couple of hours fell to new 11-month lows to nearly $71. The pipeline carries around 610k barrels day. On Wednesday, the EIA reports US crude inventories fell by nearly 5.2 mln barrels, the fourth consecutive weekly decline, which is the longest drawdown since the turn of the year. Over the past four-week, US oil stocks have fallen by almost 27 mln barrels, the most for a four-week period since July 2021. The EIA also reported a build of 5.3 mln barrels of gasoline and 6.2 mln barrels of distillates. Meanwhile, the average price of gasoline continued its decline, uninterrupted since November 8. In this span, the price has fallen by about 12.5% to around $3.33. Separately, yesterday the EIA said that domestic natural gas fell by 21 bln cubic feet, about 20% less than was expected. As of December 2, US Strategic Oil Reserves held 387 mln barrels, a 35% reduction this year, but is still above the coverage guidelines of the International Energy Agency. The Biden administration has indicated it would begin rebuilding the SPR between $67-$72 a barrel, which is not an automatic process and may (needlessly?) influence market expectations. The Deputy head of the Office of Petroleum Reserve told a Congressional subcommittee recently that the government planned on buying back around 60 mln barrels but gave no time frame.

Yesterday's preview of the PPI and University of Michigan's preliminary December survey results was fine, but the data is due today. Headline PPI is expected to extend is slowing streak for the fifth consecutive month and seven of the past eight. It peaked in March, coinciding with the first Fed hike, at 11.7%. The median forecast in Bloomberg's survey is for a 7.2% year-over-year rate in November. If so, it would be the lowest since May 2021. The core rate has slowed since the 9.7% peak in March without failure. It is expected to have slowed to 5.9% last month, which would also be the lowest since last June. Consumer inflation expectations for the 5–10-year period has been between 2.7% and 3.1% since the start of 2021. It was at 3.0% in November and may have remained there in the preliminary results for this month. Note that the NY Fed's own survey of consumer inflation expectations will be reported Monday, though is often not on economic calendars. 

The US dollar settled a little below CAD1.3600 yesterday but has come back bid today and is near CAD1.3640 in the European morning. It looks poised to test the week's high near CAD1.3700, yet the intraday momentum indicators are stretched, and US index futures are trading with a firmer bias. Initial support is seen around CAD1.3600. Assuming there is no significant reversal, this is fourth consecutive weekly loss for the Canadian dollar, the longest losing streak in April-May. The greenback peaked on Monday against the Mexican peso near MXN19.8640. It has been consolidating the surge in recent day and found support around MXN19.61-2. The dollar is better bid today and a move above yesterday's highs (~MXN19.7370) could see another attempt at the highs. The central bank meets next week is expected to match the Fed's likely 50 bp hike. Brazil report IPCA inflation today. Brazilian inflation peaked in April a little above 12% and today's report is expected to see it slip to almost 6% (from 6.47% in October). It would be the lowest since February 2021. The real is practically flat on the week after appreciating 3.4% last week.