GLOBAL MARKETS-Asian stocks are falling as China’s lockdowns raise fears of a recession

GLOBAL MARKETS-Asian stocks are falling as China's lockdowns raise fears of a recession

Speculation that Russian President Vladimir Putin might declare war on Ukraine in order to call up reserves during his speech at “Victory Day” celebrations also hurt market sentiment. Putin has so far characterised Russia’s actions in Ukraine as a “special military operation”, not a war. S&P 500 stock futures led the way with a drop of 1.0%, while Nasdaq futures shed 0.8%. U.S. 10-year bond yields edged up to a fresh top at 3.15%. EUROSTOXX 50 futures fell 1.4% and FTSE futures 0.8%. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.9%, and Japan’s Nikkei 2.1%. Chinese blue chips eased 0.6%, while the yuan touched another 18-month low to trade at 6.7049 per dollar. Investors were also tense ahead of the U.S. consumer price report due on Wednesday where only a slight easing in inflation is forecast, and certainly nothing to prevent the Federal Reserve from hiking by at least 50 basis points in June. Core inflation is actually seen rising by 0.4% in April, up from 0.3% the previous month, even as the annual pace dips a bit due to base effects.

On Monday, Asian markets fell as U.S. stock futures fell on concerns about interest rates, while a tighter lockdown in Shanghai fuelled fears about global economic growth and a possible recession. “A string of rate hikes and hawkish communication came amid falling Chinese and European activity, new plans for Russian energy curbs, and persistent supply-side pressures,” Barclays analysts warned. “This raises the bleak potential of sustained inflation, which would force central banks to raise rates despite drastically decreasing GDP.” Shanghai tightened the city-wide COVID lockdown for 25 million citizens, continuing China’s zero-COVID policy.

“In Q1, the annualised monthly change in core CPI was 5.6%,” noted analysts at ANZ. “That is too high for the Fed and we think the FOMC won’t be relaxed about inflation until the core number moderates to around 0.2% m/m on a sustained basis. “The Fed is not the only central bank facing inflation pressures. Increasingly, the guidance from the ECB is becoming a lot more hawkish.” DOLLAR IN DEMAND Fed fund futures are priced for rates reaching 1.75-2.0% in July, from the current 0.75-1.0%, and climbing all the way to around 3% by the end of the year. The diary is full of Fed speakers this week, which will give them plenty of opportunity to keep up the hawkish chorus. The aggressive rate outlook saw the U.S. dollar scale 20-year highs on a basket of majors last week at 104.070, and it was last trading firm at 104.030.

“Risk appetite is fragile and yield spreads continue to suggest further upside on the Dollar Index,” said Sean Callow, a senior FX strategist at Westpac. “We look for ongoing demand for DXY on dips, with 104 already being probed and still potential for a run towards 107 multi-week.” The euro was stuck at $1.0510 and just a whisker above its recent lows of $1.0481, while the dollar was very much in control against the Japanese yen at 130.90. Oil prices see-sawed after the Group of Seven (G7) nations committed on Sunday to banning or phasing out imports of Russian oil over time. After an initial dip, Brent was last quoted 46 cents higher at $112.85, while U.S. crude added 24 cents to $110.01. Gold was idling at $1,877 an ounce, having struggled to gain any traction as a safe haven recently.

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