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China Still Stumbling Through Covid 

China and its covid response are driving the headlines. The Hang Seng led a charge for Asian equities overnight, jumping 5% after Chinese health officials encouraged the elderly to get vaccinated – no big changes but they cannot reverse it all at once; getting the elderly vaccinated is job one. Mainland shares +2-3%. There is unease about supply chain implications from ongoing restrictions and rising cases; and concern about what protests against the government could mean for risk. But there is also a sense that the direction of travel can only be towards easing restrictions sometime in the New Year. When exactly that will be depends on many things, not least the pace of vaccinations, but it seems likely to regime will have to relent at some point.   

Fed Refuses to Relent 

Hawkish Fed comments didn’t help lift the mood yesterday on Wall Street. St Louis Fed president James Bullard, one of the most hawkish members of the FOMC, said markets were “under-pricing risk that the FOMC will have to be more aggressive rather than less aggressive in order to tame the substantial inflation in the US”. This chimes with my own view that inflation will be stickier and the Fed will need to keep going for longer than the market currently expects. NY Fed president John Williams stressed inflation was still too high and predicted unemployment could rise as high as 5% next year, from 3.7% last month. Given there are 11m jobs in the US, this implies a pretty seismic fallout in the jobs market that only higher for longer rate hikes could achieve, surely? All the major indices fell around 1.5% on Monday, the Dow just reversing off the August swing high at 34,300.  

Mixed Bag for European Commodities and Forex 

European stock markets followed mildly higher in early trading, the FTSE 100 rallying above 7,500 led by oil & gas, basic resources. Retail stocks also faring well following Black Friday and Cyber Monday. Are consumers wearing higher prices? In short yes. Look at the US retail sales figures showing them up almost 50% in nominal terms since 2019. 

Elsewhere, FX is responding to the change in risk tone with the dollar easing back overnight and into the European open. GBPUSD rose above 1.2020 after touching 1.1940 yesterday evening. EURUSD trying to recover 1.04 but stumbling; USDJPY holding at 138.  

Don’t be so Crude: OPEC Could Restrict Supply 

Oil prices were higher with some speculation that OPEC might cut output again this week. The China story is a tricky one here too since greater mobility restrictions is short-term negative for crude pricing; yet if this spurs the regime into pushing for an earlier reopening it could be more positive looking further out down the futures curve, which is looking extremely flat right now with a very mild contango through to March before it flips back into backwardation...suggests real uncertainty about the longer-term but a slight bias towards prices pushing up over the coming months.  

In Other News: BlockFi Dead, Sheepish US Consumer Data about the least surprising news since the FTX collapse BlockFi – which was bailed out in the summer by FTX - has filed for chapter 11 bankruptcy.  

Today we hear from Bank of England governor Bailey, plus it’s US Consumer confidence data. After back-to-back gains the index pulled back sharply in October. Consumers’ expectations regarding the short-term outlook remained “dismal”, with the Present Situation index down to 138.9 from 150.2 in September; whilst the Expectations Index is still lingering below a reading of 80—a level associated with recession. 

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