Recession woes continue to cloud investors’ minds
US stocks end almost flat after suffering wild swings. European gas surges as Germany clashes with Russia over supply. China tech sector’s dollar-bond selloff attracts bargain hunters. Oil ekes...
Chief Investment Office13 May 2022
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Stocks rebounded sharply in the final hour of New York trading, with the S&P 500 almost wiping out a selloff that pushed it to the brink of a bear market earlier Thursday (12 May).

The turnaround came as Federal Reserve Bank of San Francisco President Mary Daly told Bloomberg News that a 75 bps increase in rates is “not a primary consideration”, while adding that the US is in a strong place and should be able to withstand monetary tightening. For a market that has been haunted by fears that restrictive policy could cause a recession, those comments offered a degree of comfort at the end of a day marked by brutal volatility.

The caution born from rising rates held firm on Thursday as data showed prices paid to US producers rose more than forecast in April, reinforcing bets the Fed will further tighten policy. Treasuries rose with the dollar as investors sought haven assets. The euro tumbled, the Swiss franc weakened to reach parity with the dollar for first time since 2019, and Hong Kong’s Monetary Authority intervened to defend its currency peg. The Japanese yen – a traditional haven that, in an ironic twist, has not acted in that role so much of late – rallied.

The Senate voted to confirm Jerome Powell for a second four-year term as Fed chairman on Thursday, trusting him to tackle the highest inflation to confront the country in decades. The Fed began raising interest rates in March and says it will keep going until price pressures cool, seeking a soft landing that does not crash the economy. But critics doubt the central bank can avoid a recession as it tightens monetary policy that had been eased dramatically during the pandemic.

US mortgage rates jumped again this week, extending a steep climb that is shutting some would-be homebuyers out of the market. The average for a 30Y loan was 5.3%, up from 5.27% last week and the highest since July 2009, Freddie Mac said Thursday. – Bloomberg News.

The S&P 500 Index declined 0.13% to 3,930.08 on Thursday, the Dow Jones Industrial Average slid 0.33% to 31,730.30, and the Nasdaq Composite Index closed 0.06% higher at 11,370.96.



European natural gas prices jumped as some shipments from Russia were disrupted, and Germany said Moscow was using energy as a weapon in an escalating clash over supply.

The benchmark contract surged 14% as flows from Russia via Ukraine fell further Thursday (12 May) following interruptions at a cross-border entry point as a result of the war. It adds to the market’s concerns, as Moscow retaliates to Europe’s penalties with a slew of its own curbs targeting some gas companies in the region.

Late Wednesday, Russia sanctioned the owner of the Polish part of the Yamal-Europe pipeline that has hardly been deployed this year but is a key alternative to Ukraine. The ban means Gazprom cannot use that conduit anymore, the company said.

Russia also sanctioned and halted sales to Gazprom Germania and its units – which are now under the control of the German energy regulator – including supplier Wingas and London-based Gazprom Marketing & Trading. It could also upend liquefied natural gas markets and bring even greater supply worries.  

German Economy Minister Robert Habeck downplayed the immediate impact of Moscow’s move, saying the cuts amount to just 3% of the country’s imports. The nation was getting shipments from alternate sources and can cope with the disruption, he said.

The new risks come just as a solution appeared to be emerging for what has been the main headache for weeks - Moscow’s demand for ruble payments for its gas. Companies were increasingly confident they could keep buying Russian supplies without breaching sanctions, with Italian Prime Minister Mario Draghi on Wednesday appearing to back such a move. More European buyers are opening ruble accounts.

Dutch front-month gas, the European benchmark, rose as much as 22% on Thursday and settled at EUR106.701 per megawatt-hour. The UK equivalent was up 26%. German power also surged, with next month’s contract rising as much as 17%.

Concerns over Russian supplies have hung over the market for months. Flows via Ukraine hit the lowest since late April, grid data show. This is likely to affect a key gas-transit route crossing Slovakia and Austria. Authorities in Vienna said there are currently no limitations on delivery.

The Yamal-Europe link, able to carry about 20% of Russian gas exports to Europe, has not been sending the fuel along its normal route from Poland to Germany for most of this year with Gazprom relying on other lines.

Supplies via the Nord Stream link to Germany, the biggest pipeline from Russia to Europe, remain stable. But, separately, flows from Norway are set to decrease on Thursday.

Ukraine’s gas grid on Wednesday stopped accepting Russian fuel at one of the two key entry points, saying it could no longer control relevant infrastructure in the occupied territory in the eastern part of Ukraine. Gazprom said it was not able to reroute all supplies to another entry point because of how its system currently works.

No Russian gas is flowing into the Sokhranivka station on the Ukrainian border for a second day. The entry point, also known as Sokhranovka in Russian, had handled about a third of Gazprom’s flows crossing Ukraine before the halt, with the rest passing through Sudzha, the other cross-border station.

“Lost Sokhranivka supply is not dramatic, but it sends a signal for what might come down the road,” analysts said in a note. “This does not scream crisis, but it is a wake-up call for what is to come. We could likely see more supply disruptions going forward.” – Bloomberg News.

The Stoxx Europe 600 dipped 0.75% to 424.40.



The Bank of Japan (BOJ) board indicated its lack of appetite for changing policy to help address a slide in the yen to a two-decade low during discussions at a meeting last month, according to a summary of opinions from the gathering.

“It is not appropriate that the bank change its policy with the aim of controlling foreign exchange rates,” one board member said, according to the summary released Thursday (12 May). About 10% of economists surveyed before the meeting had expected the central bank to at least tone down the easing-bias in its guidance on policy.

The BOJ faces lingering speculation that it will have to adjust policy as its commitment to rock-bottom yields to support the economy pushes the yen to lows against the dollar, amplifying the costs of imports and energy for businesses and households.

Doubts over the need to keep stimulus in place will likely grow with April inflation figures out next week (ending 20 May) expected to show key prices growing at least 2%.

At the meeting, the central bank doubled down on its defence of a cap on 10Y bond yields by announcing daily unlimited buying operations as it prioritised its support for the recovery and stimulating inflation. The need to roll out repeated fixed-rate operations is an indication of the difficulty the BOJ faces in keeping bond markets in line.

The summary showed one board member saying the yen’s depreciation was having a positive impact on the economy given a continued gap between supply and demand in the economy.

Another opinion given at the meeting indicated the importance of the impact of currency moves on the economy and inflation, rather than the moves themselves. That comment also suggests little support for taking action over the yen, at least for now.

Earlier this week, Shinichi Uchida, executive director in charge of monetary policy, ruled out for the time being changes to the BOJ’s cap on yields. Economists have flagged a widening of the central bank’s band around its yield target as among the most likely adjustments should the BOJ tweak policy.

Uchida said widening the band would be equivalent to raising interest rates and indicated that would be bad for an economy that currently needs support to recover from the pandemic. – Bloomberg News.

The Nikkei 225 Index opened 1.54% higher at 26,145.00 on Friday morning, reversing its decline of 1.77% to 25,748.72 the previous session.



The regulatory headwinds and economic uncertainties weighing on China’s technology stocks have also hit the sector’s dollar bonds, a selloff that has some credit investors upbeat on future performance.

The notes’ spreads have started widening again after March’s swing, leaving them very high and attractive given many tech companies are cash-rich and lightly leveraged, said a market watcher. The firms’ debt repayment abilities have not been affected by the regulatory concerns, which “are mostly a problem for equity owners,” according to a global co-head of Emerging Market debt.

Dollar-bond spreads for Tencent Holdings (700 HK) have widened at least 30 bps this year, according to data compiled by Bloomberg, and they have expanded as much as 80 bps for Alibaba Group (9988 HK). There has been fresh weakness lately as fixed income globally continues to struggle. For equities, the Hang Seng Tech Index is down 32% in 2022, partially on worries about Chinese regulatory action that has hit areas from e-Commerce to online education to gaming.

Tech firms’ spreads narrowed some after China’s top financial policy body vowed in March to among other things ensure stability in capital markets and complete the crackdown on Big Tech “as soon as possible”. More policies could be on the way, state media outlets reported last week (ended 6 May).

Another factor weighing on the dollar bonds could be recent weakness in US investment grade debt, analysts recently wrote. Such investors likely have a higher presence in China’s high-grade tech, media, and telecom (TMT) market than other domestic sectors, and 7- to 10Y TMT names have fared worst of late in the single-A area, according to the report.

But those notes’ weakness being linked to US investment grade declines “is likely to be temporary, and spread widening due to market technicals is an opportunity”, said the analysts. – Bloomberg News

The Shanghai Composite Index slid 0.12% to 3,054.99 on Thursday (12 May), while the Hang Seng Index declined 2.24% to 19,380.34.



Skittish equity markets sentiment is taking a toll on initial public offerings (IPOs) across Asia, with a spate of deals being shelved while others are being scaled back.  

Three offerings were withdrawn in South Korea over the past week (ending 13 May), with companies citing difficulties in obtaining proper valuations. Together, the deals could have raised up to USD1.19b in a market that has not seen a big IPO since January.   

Life Insurance Corp of India’s USD2.7b share sale, a milestone for Prime Minister Narendra Modi’s administration and the biggest ever in the country, had its final size cut by 60% as the war in Ukraine dented risk appetite. Indications from the unregulated gray market suggest the debut in Mumbai next week may be bumpy.         

A Vietnamese electric vehicles maker that had been flirting with a listing in the US market this year said this will be postponed until 2023. Hong Kong – usually one of Asia’s busiest venues for companies going public – has not seen a single IPO priced this month. 

The war in Ukraine, rising inflation, and hawkish central bank policies have shrunk appetite for new share sales worldwide. Only USD996m in proceeds have been raised across Asian exchanges in May, an 80% drop vs the same period last year.

For those that managed to go public despite all this, performance has been discouraging. About 47% that listed in Asia since the start of March are now trading below their offer levels.

But some companies are still pressing ahead. Chinese medical operation services company Yunkang Group (2325 HK) is expected to price on Thursday in what could be Hong Kong’s largest IPO since March, with debut slated for 18 May.

The S&P/ASX 200 Index opened 0.77% higher at 6,994.40 on Friday (13 May) morning. The benchmark declined 1.75% to 6,941.00 the previous session.

South Korea’s Kospi Index gained 0.82% to 2,570.98 in early-Friday trading, after losing 1.63% to 2,550.08 on Thursday.

The Taiwan Stock Exchange Weighted Index tumbled 2.43% to 15,616.68.



Oil managed a slim gain with the International Energy Agency (IEA) highlighting the precariously tight state of global fuel stockpiles, while the European Union (EU) signalled its members may not yet be able to agree on a Russian oil ban.

West Texas Intermediate (WTI) settled near USD106.00 after fluctuating for most of the session on Thursday (12 May). EU nations say it may be time to consider delaying a push to ban Russian oil if the bloc cannot persuade Hungary to back the embargo. A report by the IEA demonstrated how critical Russian supplies are to maintaining global fuel balances. There is currently an “almost universal product shortage”, it said in its monthly Oil Market Report.

Oil has advanced more than 40% this year as Russia’s invasion of Ukraine upended an already tight supply-demand balance. The war is rerouting global crude flows, with the US and UK moving to ban the import of Russian barrels, while some Asian buyers take extra cargoes. As the war drags on, there is mounting pressure on the EU to curb its imports.

US distillate stockpiles – a category that includes diesel – fell to the lowest level since 2005 last week, while gasoline supplies declined for a sixth week, according to the Energy Information Administration. The IEA says diesel inventories in the Organisation for Economic Co-operation and Development are the lowest since 2008.

WTI for June delivery rose 0.40% to settle at USD106.13 a barrel in New York. Brent for July settlement was little changed falling 0.06% to settle at USD107.45 a barrel. – Bloomberg News.



The yen’s two-month freefall looks to be over as slowing growth in China and expected damage to the US economy from Federal Reserve rate hikes bolster its haven credentials, strategists say.

The currency jumped 1.3% to 128.34 per dollar Thursday (12 May), extending its rebound after last week plummeting to 131.35 against the greenback, its weakest level in around two decades. The move came even as the US currency soared against most peers in haven-inspired trading.

Declines in Treasury yields in recent days have helped weigh on the dollar against the Japanese currency, even if not against other counterparts, while the yen’s haven status appears to also be reasserting itself to some degree as US stocks take a beating. All that adds up to a notable recovery for the yen, which has been among the most battered currencies this year.

“Market sentiment has changed since the Dow broke a key chart point that held it in an elevated range despite aggressive Fed rate hikes,” said a strategist. “An adjustment in risk assets has finally taken place and that is fuelling yen buying as the market shifts to a risk-off trend.”

There seems little reason to push Treasury 10Y yields back above 3% as that level reflects markets fully pricing in the Fed’s policy outlook, a market watcher said. The yen is likely to trade in a range of 128 to 133 per dollar for now before markets decide the next direction, which may include it appreciating to test 125, he said.

The yen has plenty of room to recover. The currency is still down more than 10% vs the dollar this year as the Bank of Japan has stuck to a dovish tone even as other major central banks have tightened policy. The yen has also suffered as rising commodity prices have damaged the outlook for Japan’s resource-importing economy.

It traded around the 128.60 level in early Tokyo trading Friday. – Bloomberg News.

On Thursday, the US Dollar Index rose 0.97% to 104.851, the euro fell 1.27% to USD1.0380, the pound lost 0.40% to USD1.2202, and the yen strengthened 1.25% to 128.34 per dollar.


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