There is a definite risk-off tone to Asia’s financial markets this morning as the week gets underway. Weekend headlines were dominated by fears of secondary outbreaks of COVID-19, especially in Beijing, where part of the city has been locked down to contain a localised outbreak. South Korea and Japan to play whack-a-mole controlling their own outbreaks, highlighting what a persistent little beast COVID-19 really is.


Elsewhere, cases in the US continued to climb. Most notably, and perhaps unsurprisingly, in States that never bought in strong control measures, such as Arizona and Texas. Across the globe, from Brazil to India, to Pakistan, to Iran, cases continued climbing, in many places, alarmingly.


China’s Sinovac Biotech reported positive results for its prototype COVID-19 vaccine in a press release yesterday. It will now move to phase III trials in Brazil, a virus epicentre. That news though, has been ignored this morning. Previously, even the most tenuous scientific results from biotech companies around the world have elicited immediate rallies in asset markets. That this one has been ignored, suggests that the ocean of fast money jostling for space at the top of the recent stock market rally, remains very nervous.


Asia has a decidedly risk-off tone about it as the week commences. US stock index futures have fallen over one per cent, early Asian markets are lower, and commodity currencies and oil have fallen, with even Bitcoin under pressure. Despite Wall Street stabilising and finishing the week with a positive session, it appears that the FOMO, fast-money, peak-virus, buy-everything, v-shaped recovery herd remains nervously grazing near the edge of the cliff. 


One small comfort that the herd can take, is that strong directional moves by Asia on Monday morning’s, tend to be the wrong ones for the global trading day. Unfortunately, not always though. With positive vaccine news ignored, and with the numbers in the bullish herd still not sufficiently culled, I would argue that this is not one of those days.


Asia’s data calendar is light today and will be dominated by China, which releases May Industrial Production and Retail Sales at 1000 SGT. Singapore and Malaysia release unemployment at 1030 and 1200 SGT respectively, but are likely only of passing interest to markets.


The China data will be the highlight, with Industrial Production expected to continue rebounding by 5.0%, and the Retail Sales pace of declines expected to shrink to -2.0%. In recent times, even an underperformance by both would have been ignored. The markets twisting the narrative to “looking to the future.” Today, eyes are firmly set in the here and now, as the ocean of bullish positioning remains glued to the P&L column on their screens. Therefore, a disappointment from either or both numbers, will probably spark cries of delayed recovery in China, sparking further moves by the herd for the exit door.


As I write, Beijing has announced the lockdown of another market and its surrounding districts in the capital. Equities, oil and commodity currencies will have a tough day at the office today.


Equities sink as Covid-19 in Beijing further erodes confidence.


Wall Street made a comeback of sorts on Friday, after Thursday’s stock market rout. All three major indices are finishing higher by between 1.30 and 1.90%. All that good work has disappeared this morning though, with US S&P 500 e-mini futures down 1.405 and Dow Jones futures down 1.50% with the NASDAQ futures down 1.0%. The partial closing of Beijing and comments by the China Vice Premier that there is a high risk the cities COVID-19 outbreak could spread, spooking an already nervous market.


The Nikkei 225, Kospi and Hang Seng have all edged 0.80% lower, with Singapore’s Straits Times down 1.30%. Mainland China markets are about to open and will almost certainly follow, although some judicious “national team” buying may limit the fall-out. Australian markets have also edged lower; the ASX 200 easing by 0.60%, and the All Ordinaries down 0.50%, although both have recouped some of their initial losses.


Notably, the S&P 500 is flirting with its 200-day moving average (DMA), at 3020.00 this morning. Having avoided closing below it over the last two sessions, if no recovery occurs today, that will come to pass. That would be a quite bearish technical development, with losses potentially extending to the 100DMA at 2940.00 and then 2900.00. 


A similar story is playing out on the Dow Jones, with current prices flirting with its 100 -DMA at 25,067, having closed well below its 200-DMA at 26,358 on Thursday. A close below 25,000 opens up further losses to 23,000. 


The Nikkei 225 is just above its 200-DMA intraday, with the Australia ASX 200 now ensconced below its 100-DMA at 5892.00. There appears to be a clear trend of significant stock markets flirting with, or breaking, important support levels. How deep this correction could run, is entirely dependent on the evolution of primary and secondary COVID-19 outbreaks around the world. I have previously stated that the only factor that could derail the opioid of unlimited central bank money, was precisely this scenario. Given the hype from mid-March though, and the weight of FOMO positioning, the risk is higher, that deeper corrections in equity markets are upon us.


The US Dollar recovers this morning with commodity currencies under pressure.


With risk aversion rising again this morning, the US Dollar has staged a broad recovery this morning. Although the dollar index of major currencies is down only 0.20% to 97.12, the hammer has fallen hardest on commodity currencies. 


With their high beta to world growth, both the Australian Dollar and New Zealand Dollar have fallen by 0.50% this morning, with the Canadian Dollar down 0.30%. the fall-out is even more pronounced amongst developing nation commodity currencies. The Brazilian Real and Mexican Peso have fallen 1.50%, although admittedly, liquidity in both is typically poor in Asia. The South African Rand has also fallen 0.70%.


The Chinese Yuan, Malaysian Ringgit, Singapore Dollar are all 0.20% lower versus the US Dollar today, suggesting that the reversal in fortunes will be most keenly felt initially in the commodity currency set. Similarly, fellow havens, the Swiss Franc and Japanese Yen, are almost unchanged from Friday. The Indonesian Rupiah is most likely to be in the firing line today; however, we expect the Bank of Indonesia to continue to intervene to limit potential losses aggressively.


We would expect the US Dollar to remain firm today as concerns mount that COVID-19 has not gone away, it just took a vacation. After basking in a denial of this salient fact for the past month, the currency market correction repricing of reality may have some way to run. That will be almost entirely dependent on Beijing’s efforts in controlling COVID-19’s re-emergence there.


Oil prices sink in early Asia on COVID-19 concerns.


Oil prices climbed very modestly on Friday in sympathy with equities but have sunk rapidly this morning as secondary outbreak COVID-19 concerns sweep the markets. In particular, the partial lockdown in Beijing has spooked financial markets.


Brent crude has plunged by 3.0% to $38.00 a barrel, and WTI is 3.20% lower to $35.20 a barrel in volatile trading. One ray of light is that both contracts have partially recovered some initial losses, suggesting that bargain hunters are active amongst Asia’s physical buyers.


Brent crude is flirting with its 100-DMA at $38.40 a barrel, as it has for the past three sessions. Its inability to pull away from that event horizon, and recover its footing above $40.00 a barrel, suggests that further losses are likely. Below the 100-DMA, the next support if at $37.00 a barrel. Should that capitulate, a fall as far as $33.50 a barrel cannot be ruled out.


Similarly, WTI’s 100-DAM at $33.80 a barrel provides initial support, followed by $31.00 a barrel. WTI has traced out a well-denoted top at $40.00 a barrel which will be very hard to crack. 


Like equities, the sheer weight of fast-money speculative positioning in oil, leaves both contracts extremely vulnerable to more bad news on the COVID-19 front.


COVID-19 concerns provide no solace for gold.


Gold’s price action continues to disappoint, finishing unchanged in New York of Friday, and managing only a meagre rise in Asia today. With equities and other risk assets on the back foot across the region, gold remains stubbornly unchanged from its New York close at $1732.00 an ounce.


The new announcement by Beijing that its local lockdowns within the city will are expanding, should provide some near-term support to gold prices, however. We would expect gold to grind higher after this news with initial resistance at $1745.00 an ounce, and initial support at $1720.00 an ounce.


In the larger picture, gold still lacks the momentum required to crack its longer-term $1660.00 to $1760.00 an ounce range. Mass shutdowns in China due to COVID-19, will almost certainly see the topside of that range tested though, although it is too early to speculate on this fact. For now, being long gold above $1750.00 an ounce will remain a perilous activity, although intra-day, prices should remain well supported.