‘Investors may need to pare back on reopening China trades’

Bloomberg

A sharp increase in China’s Covid infections following an abrupt end to strict pandemic control measures suggests investors may need to pare back on reopening trades, according to Morgan Stanley.
“We would recommend that investors put on hedges in the markets where investors are almost fully pricing in reopening trades,” strategists including Min Dai and Gek Teng Khoo wrote in a note. China’s rates market falls in that category as growth is expected to slow in the coming weeks and months, prompting the central bank to remain dovish.
The bank’s latest view marks a rethink of its recommendation in early November to add trades that could benefit from China easing its Covid Zero policy. “It is possible that the market will look through short-term disruption and keep an eye on the end-game, which we maintain will be a reopened Chinese economy,” it said, adding that if Covid cases spiral quickly the market could price in some additional risk premium in the rest of emerging markets.
Wagers on a reopening-led economic rebound pushed China’s five-year non-deliverable interest rate swaps 44 basis points higher in November, the steepest monthly rise since 2016. It advanced to as high as 2.91%, before easing to around 2.8%.
Morgan Stanley strategists recommend receiving China’s five-year NDIRS, a trade that would benefit as rates fall.