Investor sentiment continues to be weak as Covid-19 infections emerge in China while fresh Europe-Russia gas angst is mounting up.
After China’s two-month lockdown, the gradual easing of restrictions provided some optimism that the world’s second-largest economy could help take the pressure off the persistent supply-side issues. Then came the discovery of the new subvariant Omicron case in Shanghai, suggesting that China could impose wider restrictions if the Covid-19 outbreak grows.
Macau is feeling the pain after starting a week-long shutdown from today of all non-essential businesses, including casinos, to get rid of the BA.5 subvariant. Eleven Chinese cities are now under full or partial lockdowns, affecting almost 115 million people or 8.1 per cent of the population, according to Nomura.
Concern about the situation is expected to slow energy demand and overshadow investor sentiment while central banks hike interest rates to suppress multi-year high inflation.
Starting this week is the annual maintenance of the biggest single pipeline carrying Russian gas to Germany. Flows are expected to stop for ten days. However, investors are sceptical about the timeframe and believe that it could be longer due to the war in Ukraine. On the flipside, investors are concerned that Russia could cut off gas altogether and what negative impact it would have on companies and the oil price - which would move signficantly higher.
Meanwhile, investors remain jittery around plans by the West to cap Russian oil prices. President Vladimir Putin warned further sanctions could lead to "catastrophic" consequences in the global energy market.
Set to take a bit of attention is President Joe Biden’s trip to the Middle East this week, which could have a significant effect on the oil price. Since soaring prices at the pump have become a political issue, the Biden Administration has tapped into the Strategic Petroleum Reserve to supplement the tight market. The reserve is sitting at its lowest levels since April 1986.
While all this seems grim, as equities turn lower while the US dollar firms up, one missing ingredient to the risk-off sentiment is treasuries.
Treasuries are steady at the time of writing, leaving the US 10-year yield around 3.08 per cent. This signals that investors are worried ahead of Wednesday’s US consumer price index (CPI) date for June.
The possibility for more lockdowns in China and growing Russian energy tension could deliver supply shocks with inflationary consequences, while compressing economic output. This means that investors will be combing through the upcoming US CPI data hoping for news that inflation has peaked. This would help lighten fears about a global recession.
With this on the horizon, it could explain investors’ reluctance to buy long in treasuries.