Global equities pare weekly loss on China reopening rally

Global equities trimmed a weekly loss as Chinese shares surged amid signs that authorities are trying harder to ease the impact of its Covid-Zero policy. Treasuries were little changed before US payrolls data.

US futures advanced, with the Nasdaq 100 poised to trim its biggest weekly drop since the start of the year, and US-listed Chinese stocks surging in premarket trading. Miners led gains in Europe as commodities rallied, while luxury stocks also got a boost.

Investors were heartened by news that US audit officials were ahead of schedule in on-site inspections of Chinese companies, and that a system penalizing airlines for bringing virus cases into the country may be scrapped.

Focus will turn to US payrolls data for clues on the strength of the labor market and pace of Federal Reserve tightening. A key segment of the Treasury curve reached an extreme of inversion not seen since the 1980s, an anomaly that historically preceded economic downturns.

“Today’s numbers need to be viewed in the light of other labour market statistics that shows labour demand holding up,” said Stuart Cole, head macro economist at Equiti Capital. “The concerns over still strong inflationary pressures will be trumping any meaningful easing that the labour market might be pointing to.”

Swaps that reference future Fed meetings indicate an expected peak policy rate above 5.14% around mid-2023.

Meanwhile, European Central Bank President Christine Lagarde said interest rates may need to be lifted to restrictive levels to drag inflation back to the 2% target. Bank of England Chief Economist Huw Pill said the BOE is trying to strike a balance between bringing inflation back to target and preventing an unnecessarily deep recession by raising interest rates too aggressively.

“Our view has been for a while that the only way central banks can credibly tame inflation is through tighter financial conditions and slower growth,” Barclays analysts wrote in a note. “Chairman Powell made it clear that over tightening may be a less costly option over the long run than doing too little. So as it stands, we find few reasons to stop worrying about a hard landing.”

UK bonds fall after Andrew Hauser, executive director for markets at the BOE, said the central bank will outline how it will unwind its recent emergency gilt purchases “shortly.”

The dollar weakened, while the offshore yuan advanced.

Hong Kong’s benchmark Hang Seng Index saw the biggest weekly jump since 2011 and China’s CSI 300 Index capped its best week since mid-2020.

The rally follows days of speculation on the back of unverified social media posts detailing a reopening plan. While similar Chinese rallies have all fizzled in recent months, bulls are now betting that some of the world’s lowest valuations have left the nation’s shares primed to surge on any hint of good news.

Elsewhere, European gas and power prices jumped after Electricite de France SA issued yet another warning about its troubled nuclear fleet, adding to pressure on the region’s tight energy supplies this winter.

—Bloomberg