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The prevailing winds from Wall Street have rapidly changed direction in Asia today. Regional markets are weighed down by the escalating COVID-19 outbreak in Beijing, Korean sabre-rattling, weak Japanese trade data, and escalating tensions on the India/China border.

That was in sharp contrast to the Wall Street session, which was boosted by a decidedly risk-on atmosphere. The Federal Reserve entering the corporate bond market, along with hopes of a $1.0 trillion infrastructure package from the White House, and a blockbuster retail sales print, boosted equities across the board. Markets received more performance-enhancing substance with the news that a commonly available steroid, appeared to improve survival chances in seriously ill Covid-19 patients drastically.

It is perhaps a sign of the times, that no amount of chemical enhancement from outside Asia can uncouple its dependency on the health of China. In this case, the fears are well founded though. A lockdown of Beijing would be a Wuhan on steroids, being a governmental and commercial centre of China, and much more massive on any measure then Wuhan. The economic implications would be profound in China, and by default, the rest of Asia.

Readers should keep a close eye on developments in the Himalayas between China and India as well. 20 Indian soldiers were killed in the latest exchange, and yet again, China finds itself in the middle of another diplomatic conflict on its borders. Further escalations could well wrong-foot mega-bullish markets.

China also “discovered” insects among Canadian logs overnight, following on from Barley-gate with Australia. China’s diplomatic belligerence could well come back to bite it in future years. As Covid-19 passes and trading blocs around the world reassess the indirect cost of China dominated supply chains, the true value of vulnerability to China’s temper tantrums may well outweigh the opportunity cost of commercial venturing there.

Turning away from the seemingly never-ending cycle of China’s belligerence, the world’s data calendar is modest for the rest of the week. Tomorrow, both Indonesia and Taiwan announce rate decisions, with both expected to save their reference rates again. US Initial Jobless claims are expected to show another 1,3 million American’s joining the unemployment queues. That though, will be less than last week. It continues a trend of improving, although still ghastly, headline numbers. Nobody said the market has a conscience.

Equities are gently lower in China Covid-19 concerns.

Beijing has increased its Covid-19 alert level this morning, further restricting transport and expanding localised lockdowns. That more than anything has tempered the exuberance of equity markets in Asia, even as Wall Street ‘roid-raged higher overnight. The sentiment was not helped by abysmal Japanese trade data today, with both exports and imports badly undershooting expectations.

That has made the Nikkei 225 one of the worst performers today, lower by 0.50%. The Kospi, Hang Seng, Straits Times, ASX 200 and All Ordinaries are all around unchanged to ever so slightly negative. It is a similar story on Mainland China, with the Shanghai Composite 0.10% higher, and the CSI 300 down 0.10%.

All-in-all, the price action in Asia indicated short-term caution by the region for its principal trading partner, and not a structural turn in sentiment for the bull market. Central banks still have the monetary spigots wide open, the underlying drive of the remarkable asset market recovery since March. That said though, from a regional point of view, all eyes will be on Beijing’s containment efforts. The only thing that could undermine the global equity rally in my mind has always been large scale new outbreaks of Covid-19 shutting economies down again. China would be the worst place for that scenario to come to fruition, for China, and the rest of the world.

The US rises again as Treasury yields firm.

The assumption is that President Trump’s $1 trillion infrastructure fund would be funded by issuing a lot of new government debt. The impressive rebound in retail sales also adding to the worst-is-over tone. That was enough to see treasury yields rise slightly in New York overnight, which boosted the US Dollar yet again, for the second day in a row. The dollar index rose 0.35% to 97.04.

Amongst the majors, the EUR/USD and GBP/USD fell by 0.60%to 1.1295 and 1.2565 respectively. The USD/BRL rose 1.70% to 5.2440, with USD/ZAR climbing 0.85% to 17.2230. The AUD/USD fell again by 1.0% to 0.6886, with the NZD/USD suffering a Covid-19 induced cough, falling 0.70% to 0.6450. The US Dollar has eased a little in Asia, as equities endure a tepid session.

The price action of the past few days, has more than a hint of a corrective trimming of positions about it. It is no coincidence that the currencies mentioned above, have been amongst the big beneficiaries of the global recovery rally. Quid pro quo, most were likely overdue a correction that still leaves the lower Dollar trend intact.

As per equities, an escalation of the Covid-19 situation in Beijing could see a further resurgence by the US Dollar and other haven currencies such as the Swiss Franc and Japanese Yen. In Asia, that occurrence would likely leave the Indonesian Rupiah and Malaysian Ringgit among the most vulnerable to losses, being the primary regional beneficiaries of the global recovery rally. The Bank of Indonesia has been very aggressive in its recent currency interventions, though, and we would expect more of the same if the IDR suddenly weakens.

Oil slides in Asia after an impressive New York session.

Steroids, infrastructure, and burgeoning retail sales all had much the same effect on oil overnight in New York, leaving both Brent and WTI looking swol. Both contracts recouped early losses to finish pumped up by 2.60% at $40.80 and $38.20 a barrel respectively.

Covid-19 jitters and geopolitical concerns have most of the benefits of oil’s vigorous workout overnight—Brent crude easing back 1.60% to $40.20 a barrel. WTI is calling in injured, losing 2.40% on its way back to $37.25 a barrel.

Sentiment has also been tempered by the IMF downgrading its global outlook, leaving oil in a consolidative training phase price action-wise. Oil long positions appear to be more nervous at these heady heights than equity players are. Poor official US Crude Inventory could be the catalyst for another downward correction. What is clear, though, is that oil is far more sensitive to the effects of a secondary Covid-19 outbreak in China than other asset classes.

Gold, the asset class that time forgot.

Gold spent the overnight session on the side-lines, finishing almost unchanged at $1727.00 an ounce. Despite some intra-day volatility during the past five days, gold has closed somewhere between $1723.00 and $1730.00 an ounce over the past week. That suggests that gold’s price action is being dominated by fast-money intraday players, with longer-term investors content to remain on the side-lines.

That is a notable factor for gold prices. Short-term money is less likely to take out important support and resistance levels and then consolidate. Thus, the risks have increased that strong moves higher or lower intra-day, is either a bull or bear trap.

Longer-term investors will have to remain patient for now as gold consolidates in a narrowing $1705.00 to $1745.00 range. A break-out is coming, but patience will be a more rewarding strategy than trying to second guess the next big move.