Markets rise as China eases lockdowns, signals stimulus; wall of worries remains

Tue 31 May 22, 11:24am (AEST)
China red flag
Source: iStock

Key Points

  • Shanghai is set to exit out of a brutal 2-month lockdown on June 1
  • Policymakers have a 50-point plan to get Shanghai back on its feet
  • Risks remain towards the downside as treasury yields pick up, oil prices remain high

Investors are hopeful that the worst is now behind China as lockdowns are poised to ease in major cities including Shanghai and Beijing.

Shanghai policymakers have laid out a 50-point plan to get the economy back on its feet. The “extraordinary” measures are expected to alleviate 300bn yuan of financial burden for individuals and businesses, including:

  • Delay insurance and mortgage fees for impacted businesses

  • Delay tax filing deadlines for individuals and companies

  • 4-6 month rent reduction for small businesses that rent from state-owned properties

  • Subsidies for private-owned properties that reduce rent for tenants

  • Supporting construction of infrastructure projects including rail, ports and energy infrastructure

Local Chinese governments have also released stimulus packages targeted at boosting car sales, including:

  • Rebates of 10,000  yuan (US$1,500) for trade-ins of gasoline vehicles for EVs for the rest of the year

  • Increasing new license plate quotes (which is generally a fixed number)

Implications for stocks

China reopening could extend this so called 'bear market rally', ahead of catalysts such as the June 17 Fed meeting and surging oil prices.

The resumption of industrial activity and social mobility in China could see some positive flow for sectors such as commodities (notably iron ore and lithium) and oil.

According to Bloomberg, several Chinese lithium and battery stocks have rallied more than 30% from late April lows, buoyed by the view that easing restrictions and subsidies will boost raw material demand from EV makers.

Wall of worry remains

The recent bounce has many investors wondering "how long will this rally last?"

The US 10-Year Treasury Yield, which topped out in early May around 3.2% has started to stabilise and bounce off 2.7% levels. Surging yields has caused troubles for equity markets.

On the economic front, Germany's annual inflation rate hit 7.9% in April, the highest reading in almost half a century.

Inflation could remain stubborn following EU's partial Russian oil ban alongside other oil demand side factors such as China's reopening and the northern hemisphere's "driving season".

Overnight, crude oil prices rallied back to a near 3-month high of US$122 a barrel.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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