China’s benchmark Shanghai Composite Index (stock market. Elsewhere in the region, Hong Kong’s Hang Seng Index ( ) fell 3.7%. Japan’s Nikkei ( ) dropped 1.9%, and Korea’s Kospi ( ) lost 1.7%.) sank 5.1% to close at a 22-month low. It was the worst day for the index since February 3, 2020, when the initial coronavirus outbreak first rocked the nation’s
European stocks also opened sharply lower on Monday. The FTSE 100 ( ) fell 2.1% in London, while Germany’s DAX ( ) slid 1.5%. France’s CAC 40 ( ) dropped 2.2%, despite market relief at Emmanuel Macron’s election victory over far-right candidate Marine Le Pen.
The fall in Asian and European markets came after a grim session on Friday for US stocks. The Dow fell about 980 points, or 2.8%, following comments about likely aggressive interest rate hikes from Federal Reserve chairman Jerome Powell. The S&P 500 and Nasdaq each dropped more than 2.5%, too.
Beijing, the capital of China with 21 million residents, began mass testing over the weekend and shut down residential compounds, raising concerns that more stringent restrictions could soon be implemented in line with other Chinese cities.
“Although some parts of China have been under restrictions longer than Shanghai, Omicron’s arrival in Beijing would be an ominous development,” wrote Jeffrey Halley, senior market strategist for Oanda, on Monday.
“China is the world’s second-largest economy and has shown no signs it intends to live with the virus,” he said. “With that in mind, the likely pressure valve is going to be disruption to China’s export machine, and a cratering of consumer confidence.” Oil prices tumbled on Monday as worries about faster US rate increases and China’s slowdown weighed on sentiment.
Futures for US oil and Brent crude, the international benchmark, both fell more than 4%. “It seems that China is the elephant in the room and markets feel that slowing China growth could materially change the supply/demand equation on international markets,” Halley said. The pressure to contain the outbreak in Beijing comes as cases continue to grow in Shanghai.
The lockdown in Shanghai has already forced many factories to suspend production and made shipping delays worse, threatening to deal a hefty shock to its vast economy and place more strain on global supply chains. Shanghai reported more than 19,000 new cases and 51 deaths on Sunday.
Oil prices opened slightly higher on Tuesday, after falling sharply the prior session on worries that continued Covid-19 lockdowns in China would eat into demand and as the U.S. dollar rose to a two-year high.
Both contracts had settled down around 4% on Monday, with Brent down as much as $7 a barrel in the session and WTI dipping roughly $6 a barrel.
In China lockdowns to counter Covid in Shanghai have dragged into their fourth week. Meanwhile orders for mass testing, including in Beijing’s largest shopping district, have prompted fears of other Shanghai-style lockdowns.
“The hit from Chinese lockdowns is over a million barrels a day and the testing of 12 districts over the next five days will determine the next major move for crude prices,” wrote Edward Moya, a senior market analyst for OANDA in a note.
The U.S. dollar also hit a two-year high on Monday, making oil more expensive for other currency holders. “Supply fears are not the primary focus for energy traders, and now you have a surging dollar that is adding extra pressure across all commodities,” OANDA’s Moya said.
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