Soaring Covid cases in China spell trouble for global markets

Investor sentiment is hampered by worries about China’s economic growth as Covid cases rise in the country. Demonstrations broke out in several cities this weekend against the Covid restrictions that have been going on for nearly three years.

China is one of the only countries in the world still applying a strict “zero Covid” policy, with repeated lockdowns and almost daily PCR tests of the population. As a result, futures on the S&P 500, the Dow and the Nasdaq 100 were down by around 0.6% this week.

This comes after global equity markets scored a positive weekly performance last week. In Europe, the Stoxx Europe 600 gained 1.7%. In the US, the S&P 500 gained 1.5%, while in Asia, the Nikkei 225 was up 1.4%.

The equity markets’ good run was fueled by a renewed risk appetite among investors, who believe that the Fed will pivot towards a more dovish stance between now and the end of next year, without having totally destroyed the economic momentum.

The context is still difficult right now. We just had the implosion of the speculative bubble surrounding crypto-currencies, we have Britain’s economic difficulties, there is the ongoing war in Ukraine and now protests in mainland China against the zero Covid policy. This unrest has been making headlines in the business press since the weekend. It has to be said that Chinese outbursts against the Party’s authority are rare and often spectacular.

From the West, it is difficult to measure the extent of the movement at this stage, but investors have already started to make assumptions. Some see this as another reason why the promised rebound of the Chinese economy is not for now. Others think that this will accelerate the lifting of health restrictions and ultimately benefit the country’s dynamics.

These tensions in China are also weighing on oil, which was already battered by recession fears. Along with the inverted yield curve, this is another sign that a recession is looming.

This week, all eyes will be on the US jobs report and on Fed Chair Jerome Powell’s speech.

There are no major statistics today, but two speeches by Christine Lagarde from the ECB and James Bullard and John Williams from the Fed.

The dollar is down 0.90% against the euro to EUR 0.9559 and inches down 0.2% against the pound to GBP 0.8281. The ounce of gold is holding steady around 1753 dollars. Oil is still under pressure, with North Sea Brent at USD 81.35 per barrel and US WTI light crude at USD 74.16. The yield on 10-year US debt remains near 3.63%. Bitcoin is falling back to USD 16,200.

(https://www.marketscreener.com/)