Asia Share Markets Fret on China COVID Outbreaks, Fed Outlook

GLOBAL MARKET - SYDNEY. Asian share markets turned hesitant on Monday as investors fretted about the economic fallout from fresh COVID-19 restrictions in China, while bonds and the dollar braced for more updates on U.S. monetary policy.

Beijing's most populous district urged residents to stay at home on Monday as the city's COVID case numbers rose, while at least one district in Guangzhou was locked down for five days.

The rash of outbreaks across the country has been a setback to hopes for an early easing in strict pandemic restrictions, one reason cited for a 10% slide in oil prices last week.

It also dragged MSCI's broadest index of Asia-Pacific shares outside Japan off a two-month high, though it still ended firmer on the week. Early Monday, the index was down 0.1%. Japan's Nikkei added 0.3%, while South Korea eased 0.4%.

S&P 500 futures were down 0.2%, while Nasdaq futures slipped 0.1% in quiet trade.

The Thanksgiving holiday on Thursday combined with the distraction of the soccer World Cup could make for thin trading, while Black Friday sales will offer an insight into how consumers are faring and the outlook for retail stocks.

Minutes of the U.S. Federal Reserve's last meeting are due on Wednesday and could sound hawkish, judging by how officials have pushed back against market easing in recent days.

Atlanta Federal Reserve President Raphael Bostic on Saturday said he was ready to step down to a half-point hike in December but also underlined that rates would likely stay high for longer than markets expected.

Futures 0#FF: imply a 76% chance of a rise of 50 basis points to 4.25-4.5% and a peak for rates around 5.0-5.25%. They also have rate cuts priced in for late next year.

"We are comfortable that the deceleration under way in U.S. inflation and European growth produces a moderation in the pace of tightening starting next month," said Bruce Kasman, head of research at JPMorgan.

"But for central banks to pause they also need clear evidence that labour markets are easing," he added. "The latest reports in the U.S., euro area, and U.K. point to only a limited moderation in labour demand, while news on wages points to sustained pressures."

There are at least four Fed officials scheduled to speak this week, a teaser ahead of a speech by Chair Jerome Powell on Nov. 30 that will define the outlook for rates at the December policy meeting.

PRICED FOR RECESSION

Bond markets clearly think the Fed will tighten too far and tip the economy into recession as the yield curve is the most inverse it has been in 40 years.

On Monday, 10-year note yields of 3.84% were trading 71 basis points below the two-year.

The Fed chorus has helped the dollar stabilise after its recent sharp sell-off, though speculative positioning in futures has turned net short on the currency for the first time since mid-2021.

Early Monday, the dollar was a touch softer at 140.26 yen, after last week's bounce from a low of 137.67. The euro held at $1.0327, and short of the recent four-month top of $1.1481.

The U.S. dollar index stood at 106.900, off last week's trough of 105.300.

"Given how far U.S. bond yields and the dollar have dropped in the past couple of weeks, we think there is a good chance that they rebound if the Fed minutes are in line with the recent hawkish language from members," said Jonas Goltermann, a senior markets economist at Capital Economics.

Meanwhile, turmoil in cryptocurrencies continued unabated with the FTX exchange, which has filed for U.S. bankruptcy court protection, saying it owes its 50 biggest creditors nearly $3.1 billion.

In commodity markets, gold was a fraction firmer at $1,751 an ounce, after dipping 1.2% last week.

Oil futures were trying to find a floor after last week's drubbing saw Brent lose 9% and WTI roughly 10%.

Brent edged up 18 cents to $87.80, while U.S. crude added 10 cents to $80.18 per barrel.