Published: 26/04/2022 By ECAPThe key theme in financial markets yesterday was undoubtedly one of risk aversion, with concerns over global growth leading to sell-offs in risk assets at the expense of the traditional safe-havens. The stubbornness of authorities in China to stick by the country’s controversial, and perhaps now unnecessarily strict, ‘zero-covid’ strategy has caused outrage among some quarters, and bewilderment among others. Despite still extraordinarily low case numbers for a country of China’s size, only a handful of deaths during the latest wave of infection, and a successful vaccination rollout, a number of major cities remain under strict lockdown measures. The tough restrictions imposed in Shanghai have dragged on for a fourth week - some local authorities have even begun fencing off apartment buildings in order to restrict population movement. Mass testing has also now begun in Beijing, triggering panic buying of essentials and concerns that the country’s capital may soon be placed under a similarly tough set of restrictions.
Markets reacted to the news of possible new lockdowns, in a classic ‘risk off’ mode, with investors spooked that weaker demand in Asia’s largest economy could hurt global growth. These concerns have been exacerbated by recent hawkish rhetoric from many of the world’s major central banks, notably the Federal Reserve, which have indicated in no uncertain terms that interest rates are set to be raised aggressively in the coming months in order to combat rising prices.
In FX, the traditional safe-haven currencies rallied, led by the Japanese yen and, to a slightly lesser extent, the US dollar. Risk currencies traded lower across the board, led by the likes of the Norwegian krone and Swedish krona, which were both down around 2% for the day against the US dollar. The euro and sterling also both fell in excess of half a percent - the former declined to its lowest level since March 2020, with the latter dropping to its lowest level since September 2020.