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Shanghai aims to reopen more COVID-shut businesses, Beijing battles on

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© Reuters. FILE PHOTO: Police and security members in protective suits stand outside cordoned off food stores following the coronavirus disease (COVID-19) outbreak in Shanghai, China March 29, 2022. REUTERS/Aly Song

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By Brenda Goh and Albee Zhang

SHANGHAI/BEIJING (Reuters) -Shanghai will gradually begin reopening businesses such as shopping malls and hair salons in China’s financial and manufacturing hub from Monday after weeks in strict COVID-19 lockdown, while Beijing battles a small but stubborn outbreak.

All but shut down for more than six weeks, Shanghai is tightening curbs in some areas that it hopes marks a final push in its campaign against the virus, which has infuriated and exhausted residents of China’s largest and most cosmopolitan city.

Shopping malls, department stores, and supermarkets will begin resuming in-store operations and allow customers to shop in “an orderly way”, while hair salons and vegetable markets will reopen with limited capacity, Vice Mayor Chen Tong told a media briefing on Sunday.

He gave no specifics on the pace or extent of such reopenings, and many residents reacted online with scepticism.

“Who are you lying to? We can’t even go out of our compound. You can open up, no one can go,” said a user of China’s Twitter-like Weibo (NASDAQ:WB), whose IP showed as being from Shanghai.

During Shanghai’s lockdown, residents have been mainly limited to buying necessities, with normal shopping on online platforms largely suspended due to a shortage of couriers.

And while barbers and hairdressers have been giving haircuts on the street or in open areas of housing compounds, residents recently able to leave their homes for a few hours at a time to walk or buy groceries have generally appeared more dishevelled than usual.

OUTLIER APPROACH

China’s strict “dynamic zero” approach to COVID has put hundreds of millions of people in dozens of cities under curbs of varying degrees in an attempt to eliminate the spread of the disease. The curbs are wreaking havoc on the world’s second-largest economy even as most countries try to return to normal life despite continued infections.

New bank lending hit the lowest in nearly four and half years in April as the pandemic jolted the economy and weakened credit demand, central bank data showed on Friday.

The Asian Football Confederation said on Saturday that China had pulled out of hosting the 2023 Asian Cup finals due to the COVID crisis. This followed China’s cancellation or postponement of numerous international sporting events it was scheduled to hold in the second half of 2022.

The decision on the soccer tournament prompted social media speculation in China that its zero-COVID policy could persist well into next year.

China managed to keep COVID at bay after it was first discovered in the central city of Wuhan in late 2019, but has struggled to contain the highly infectious Omicron variant. The head of the World Health Organization said last week China’s approach not “sustainable”.

But the country is widely expected to stick with its approach at least until the congress of the ruling Communist Party, which is historically in the autumn, where President Xi Jinping is poised to secure a precedent-breaking third five-year leadership term.

Case numbers in Shanghai continued to improve, with 1,369 daily symptomatic and asymptomatic infections reported, down from 1,681 a day earlier.

Importantly, the city reported no new cases outside of quarantined areas after finding one a day earlier. Consistently achieving zero cases outside quarantined areas is a key factor for officials determining when they can reopen the city.

Shanghai has achieved its zero-COVID target in more thinly populated suburban districts and started easing curbs there first, such as allowing shoppers to enter supermarkets.

But it continued to tighten restrictions in many areas over the past two weeks, especially in the city centre, curtailing deliveries and putting up more fencing.

In most of Beijing, restaurants were shut for dining-in and residents have been urged to stay or work from home. Parks and other entertainment venues have been closed, sending many people onto streets or into the gardens of their housing compounds to enjoy fine spring weather.

In the large Chaoyang district, residents were reminded by text message and in some instances by door knocks to get their daily COVID test as the capital scrambles to cut infection chains.

Economy

As bear market looms, battered Wall St seeks elusive ‘Fed put’

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© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 21, 2022. REUTERS/Brendan McDermid

By David Randall

NEW YORK (Reuters) -The Federal Reserve’s determination to raise interest rates until it squashes the highest inflation in decades is darkening the outlook across Wall Street, as U.S. stocks stand on the cusp of a bear market and warnings of a recession grow louder.

At issue is the so-called Fed put, or investors’ belief that the Fed will take action if stocks fall too deeply, even though it has no mandate to maintain asset prices. One oft-cited example of the phenomenon, which is named after a hedging derivative used to protect against market falls, occurred when the Fed halted a rate hiking cycle in early 2019 after a stock market tantrum.

This time around, the Fed’s insistence that it will raise rates as high as needed to tame surging inflation has bolstered the argument that policymakers will be less sensitive to market volatility – threatening more pain for investors.

A recent survey by BofA Global Research showed fund managers now expect the Fed to step in at 3,529 on the S&P 500, compared with expectations of 3,700 in February. Such a drop would constitute a 26% decline from the S&P’s Jan. 3 closing high.

The index, which closed Friday at 3,901.36, is already down almost 19% from that high this year on an intraday basis – close to the 20% decline that would confirm a bear market, according to some definitions. [.N]

“The Fed has bigger fish to fry and that’s the inflation problem,” said Phil Orlando, chief equity market strategist at Federated Hermes (NYSE:FHI), who is increasing his cash levels. “The ‘Fed put’ is kaput until the central bank is confident that they’re no longer behind the curve.”

As a result, some investors are digging in for a long slog. BofA’s survey showed cash allocations at a two-decade high, while bets against technology stocks stand at their highest since 2006.

Strategists at Goldman Sachs (NYSE:GS), meanwhile, earlier this week published a “Recession manual for US equities” in response to client inquiries on how stocks will perform in a downturn. Barclays (LON:BARC) analysts said that numerous negative near-term catalysts mean the risks for stocks “remain firmly stacked to the downside.”

The S&P 500 closed broadly unchanged on Friday, reversing a sharp intraday decline that had briefly put it into bear market territory. The index marked its seventh straight week of losses, the longest streak since 2001.

Jason England, global bonds portfolio manager at Janus Henderson Investors, believes the index needs to fall at least another 15% for the Fed to slow its tightening, given that unprecedented monetary policy support helped stocks more than double from their March 2020 lows.

“The Fed is being very clear that there will be some pain ahead,” he said.

The Fed has already raised rates by 75 basis points and is expected to tighten monetary policy by 193 basis points this year. [/FEDWATCH] Investors will get more insight into the central bank’s thinking when minutes from its last meeting are released on May 25.

2018 REDUX?

Some worry the Fed risks exacerbating volatility if it does not heed possible danger signs from asset prices. Analysts at the Institute of International Finance said stocks may be subject to the same type of selling that rocked markets in late 2018, when many investors believed the Fed tightened monetary policy too far.

“In the past, rising uncertainty and mounting recession risk have had important effects on investor psychology, making markets less tolerant of monetary policy tightening that is seen as no longer warranted,” IIF analysts wrote on Thursday. “The risk of a similar market tantrum (to 2018) is rising again now as markets fret about global recession.”

There have been signs of resilient sentiment among investors. For example, the Cboe Volatility Index, known as Wall Street’s fear gauge, is elevated but below levels it reached during previous major selloffs.

And the ARK Innovation Fund (ARKK.K), which became emblematic of the pandemic rally, has brought in net positive inflows of $977 million over the last six weeks, Lipper data showed. The fund is down 57% in 2022.

While some investors say those are signals that markets are yet to bottom, others are more hopeful.

Terri Spath, chief investment officer at Zuma Wealth, believes some investors are re-entering parts of the stock market that have suffered outsized losses.

“The Fed is already seeing signs that they won’t be needed as a buyer of last resort,” she said.

Analysts at Deutsche Bank (ETR:DBKGn) are less optimistic.

“The Fed having badly erred on the side of excess inflation in 2020/21, cannot afford to make the same mistake twice – which favors more financial conditions tightening, and ongoing high (volatility) panicky markets,” they wrote.

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Economy

Australian prime minister concedes defeat in election

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© Reuters. FILE PHOTO: Australian Prime Minister Scott Morrison attends the third leaders’ debate at the Seven Network Studios during the 2022 federal election campaign, in Sydney, Australia May 11, 2022. Mick Tsikas/Pool via REUTERS

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SYDNEY (Reuters) – Australian Prime Minister Scott Morrison said he had conceded defeat in a national election on Saturday, saying that while vote counting was incomplete the opposition Labor party looked likely to form a government.

“Tonight I have spoken to the Leader of the Opposition and the incoming Prime Minister, Anthony Albanese, and I’ve congratulated him on his election victory this evening,” Morrison said at a televised speech in Sydney.

Morrison added that he would stand down as leader of the Liberal party.

The capitulation ends eight years and nine months in power for Morrison’s conservative coalition. Morrison became prime minister in 2018 after several leadership changes.

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Economy

Bear market beckons as stock volatility continues in 2022

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© Reuters. FILE PHOTO: A trader works on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., May 20, 2022. REUTERS/Andrew Kelly

By Lewis Krauskopf

NEW YORK (Reuters) – The stock market’s brutal year neared a grim milestone as the S&P 500’s slide on Friday threatened to leave it in a bear market for the first time since March 2020, fueled by worries over sky high inflation, a hawkish Federal Reserve and future economic growth.

The benchmark S&P 500 index fell below 3837.248 during Friday’s session, a decline that on an intraday basis put it more than 20% below its Jan. 3 record closing high. However, the index closed above that level, and did not confirm it was in a bear market – frequently defined as a drop of at least 20% from a closing high.

If history is any guide, a bear market would mean more pain could be in store for investors. The S&P 500 has fallen by an average of 32.7% in 13 bear markets since 1946, including a nearly 57% drop during the 2007-2009 bear market during the financial crisis, according to Sam Stovall, chief investment strategist at CFRA.

It has taken a little over a year on average for the index to reach its bottom during bear markets, and then roughly another two years to return to its prior high, according to CFRA. Of the 13 bear markets since 1946, the return to breakeven levels has varied, taking as little as three months to as long as 69 months.

Graphic: S&P 500 bear markets since 1946 – https://graphics.reuters.com/USA-STOCKS/BEAR/zjvqkmznwvx/chart.png

The S&P 500 surged some 114% from its March 2020 low as stocks benefited from emergency policies put in place to help stabilize the economy in the wake of the COVID-19 pandemic.

That decline went into reverse at the start of 2022 as the Fed grew far more hawkish and signaled it would tighten monetary policy at a faster-than-expected clip to fight surging inflation. It has already raised rates by 75 basis points this year and expectations of more hikes ahead have weighed on stocks and bonds.

Fed Chairman Jerome Powell has vowed to raise rates as high as needed to kill inflation but also believes policymakers can guide the economy to a so-called soft landing.

Adding to the volatility has been the war in Ukraine, which has caused a further spike in oil and other commodity prices.

Graphic: S&P 500 timeline in 2022 – https://fingfx.thomsonreuters.com/gfx/mkt/jnvwezxjgvw/Pasted%20image%201653063479826.png

A few areas of the stock market have been spared. Energy shares have soared this year, along with oil prices, while defensive groups such as utilities have held up better than broader markets.

Graphic: S&P 500 sectors since all-time high – https://graphics.reuters.com/USA-STOCKS/BEAR/znpnemwbdvl/chart.png

On the flip side, shares of technology and other high-growth companies have been hit hard. Those stocks — high fliers during much of the bull market over the past decade — are particularly sensitive to higher yields, which dull the allure of companies whose cash flows are weighted more in the future and diminished when discounted at higher rates.

Some of the biggest of these companies, such as Tesla (NASDAQ:TSLA) and Facebook (NASDAQ:FB) owner Meta Platforms, are also heavily weighted in the S&P 500 index.

Graphic: Casualties in 2022 stock market – https://graphics.reuters.com/USA-STOCKS/BEAR/egpbkwajjvq/chart.png

Investors have looked at various metrics to determine when markets will turn higher, including the Cboe Volatility Index, also known as Wall Street’s fear gauge. While the index is elevated compared to its long-term median, it is still below levels reached in previous major selloffs.

Graphic: VIX and bear markets – https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoxrbyvr/Pasted%20image%201653068998738.png

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