US future open higher as China to to scrap inbound quarantine rules

MARKETS

U.S. stock futures rose at Asia open on follow-through from a relatively benign PCE last Friday, but this is the time of year when more questions are asked than quality answers provided

Any sign of ebbing of inflation constraint for U.S. equities is incredibly significant; remember, as recently as late summer, it was not evident that inflation was under control.

However, should the recession theme take on more weight in 2023, S&P 500 is undoubtedly NOT priced for a hard landing, which is still a base case on Wall Street?

China continues to fast-track the border reopening, no longer subjecting inbound travellers to quarantine in early January. Tacitly, policymakers have decided to accept a sizeable Covid wave.

In the near term, activity will remain weak, but an earlier exit means growth could recover strongly as soon as late Q1 or Q2 2023 rather than in Q3, as many had assumed.

US economic growth for 2022 was better than everyone feared. The bad news, however, is weaker figures will show in early 2023. This uncertainty makes central bankers’ jobs much more difficult as they navigate the waters of high inflation (both headline and core) and tight job markets, all while growth slows. And not too surprising the year is ending with an unusual twist as policymakers are in a state of disorder, with some super hawkish and others less so.

ASIA FOREX

Growth expectations are crucial for the direction of the CNY. In the past few weeks, the exchange rate has been driven by news related to China’s relaxation of Covid controls. So, today’s fast-track reopening headlines should be positive for the CNH, especially with traders placing the bullish markers on the timing and magnitude of an actual activity growth rebound.

OIL MARKETS

Despite oil prices flaring last week, the market remains in a tremendous state of flux, given the uncertainty surrounding the trajectory of both global oil demand and supply. Although fears of a worldwide recession have been dictating the direction of crude oil prices over the past few months, this factor may only dominate for a short time. The global oil supply picture remains ominous as Russia could still end up shutting in production, and OPEC+ could curtail output further.

Meanwhile, we believe that the reopening in China (the world’s second-largest consumer) should help offset weaker demand in the U.S. and Europe, resulting in a modest rise in global oil demand. Still, the more prominent source of uncertainty facing the oil market lies on the supply side, which means the overall market balance is likely to remain very tight.

Barring a deep and protracted global recession, we think the oil market’s intense rollercoaster ride should continue in 2023.

GOLD MARKETS

Gold remains supported by seasonal trends and central bank buying, and as people start to recalibrate the 2023 portfolio with investment confidence tapering off, gold is getting bought as a keen diversifier