Markets extend rally, China zero-Covid hopes boost Hong Kong

HONG KONG -Asian and European markets rose again Tuesday, building on the strong start to the week as traders look ahead to the Federal Reserve’s policy decision, hoping it will signal a more dovish approach to fighting inflation.

Hong Kong led the rally with Shanghai following unconfirmed posts on Chinese social media saying officials were putting together a committee to discuss how to move the country away from its economically damaging zero-Covid policy.

While Wall Street suffered a pullback from a recent rally, the mood in Asia remained optimistic while bargain-buying also provided some much-needed support to Hong Kong and Shanghai.

The Fed is widely expected Wednesday to announce a fourth straight 75-basis-point rate hike as it tries to rein in runaway prices, which has led to worries it will tip the world’s top economy into recession, sending stocks tumbling.

But a report last month suggesting officials are looking to dial down the pace of increases has sparked a rally in risk assets over the past week, helped by signs other central banks are also trying to take a step back.

“Fifty basis points or 75 basis points in December is ultimately less important than the path (Fed boss Jerome) Powell lays out for next year,” said Stephen Innes at SPI Asset Management.

“If push comes to shove, the Fed probably does not want to see the market pricing cuts as soon as the hike cycle finishes, so I expect the rhetoric to be targeted here.”

Data showing eurozone inflation hit a record 10.7 percent last month — fanned by a 41.9 percent rise in energy costs — drove home the fine line banks must walk in battling rising prices while trying to cushion fragile economies.

That came as other figures showed manufacturing around the world is shrinking owing to the spike in prices and borrowing costs.

“A global manufacturing contraction is here,” said OANDA’s Edward Moya.

“Factory activity is taking a big hit as China struggles with Covid, Europe is headed towards a recession, and as the US economy finally feels the impact of inflation and Fed tightening.”

Hong Kong led the gains, jumping more than five percent after an unverified document online referring to the zero-Covid committee and a possible relaxation of measures in the new year, Bloomberg News reported.

The news comes after the world’s number two economy has been battered by a series of lockdowns around the country aimed at stamping out the disease, hammering productivity and sending markets plunging.

However, neither Chinese state media nor government officials have suggested that the meeting actually took place, or that such a committee was established, raising questions about the veracity of the statement.

“I think the market’s reaction shows how much anticipation there has been for the reopening in the market,” Hao Hong at Grow Investment Group said. Stock market gains were led by reopening names, including travel companies.

The gains were led by a surge in beaten-down tech giants including Alibaba, JD.com, Meituan and Tencent, while Macau casinos saw double-digit advances.

Shanghai climbed more than two percent, while the yuan also rallied after recently falling to record lows against the dollar.

There were also big gains in Singapore, Seoul, Taipei, Mumbai and Bangkok. London, Paris and Frankfurt rallied at the open.

Sydney was also well up after the Australian central bank lifted rates by 0.25 percentage points to a near-decade high but brushed off calls for a bigger raise, surging despite inflation.

The prospect of China easing back from its strict containment measures also lifted oil prices, which jumped around two percent as demand expectations picked up.

Investors are also keeping tabs on the earnings season, with several big-name firms reporting this week. The announcements come after a number of US companies have surprised with better-than-expected results, suggesting they are holding up despite the tough trading environment.