China Pandemic Woes

Markets appeared optimistic last week that China could shift from its strict zero-Covid policy, but the situation does not seem to support such a move. In fact, Chinese authorities will continue with their strict containment strategy according to Xinhua, citing officials from the national administration of disease prevention and control. ^[1]

Cases of the novel coronavirus are elevated lately, with mainland China reporting 535 locally transmitted confirmed COVID-19 cases on Sunday, from 526 on the previous day. Overall, there were 4,961 newly identified local asymptomatic carriers, from 3,894 on Saturday. ^[2]

Economic Impact

This zero-Covid policy can shut down factories and businesses and lock communities down, when outbreaks are detected, which affects economic activity. Disney's Disneyland in Shanghai is temporarily closed since last week ^[3], while EV Startup Nio (NIO.us) faced production and delivery challenges in October ^[4] and its factory activity was temporarily suspended last week, according Reuters. ^[5]

On Sunday, tech giant Apple announced that its factory in Zhengzhou "is currently operating at significantly reduced capacity" due to Covid restrictions, temporarily affecting the iPhone 14 Pro and iPhone 14 Pro Max production. As such, it now expects lower shipments of these devices and longer wait times for consumers. ^[6]

Trade Jitters

Today's trade balance data from the world's second largest economy and second biggest consumer of oil, showed that Exports dropped 0.3% in USD terms in October, the first year-over-year decline since May 2020 and the height of the pandemic. Imports did not fare better, since they declined by 0.7% y/y, while the trade surplus narrowed to US$ 85.15 billion.

These poor trade data, come just a few day after shipping giant A.P. Moller-Maersk had lowered its 2022 guidance for global container demand, due to slower economic activity, now expecting a 2-4% contraction. ^[7]

USOIL Analysis

Fears over the Covid-19 situation in China and disruptions in factory activity, along with trade jitters and prospects of economic slowdown, amidst aggressive monetary tightening by the Fed and other central banks, weigh on oil prices.

As such, USOil gapped lower today, which makes it vulnerable to a return back into the daily Ichimoku Cloud and a test of the EMA200 (at around 87.20). Daily closes below this level, can bring 79.88 in the spotlight, but a test will likely require a catalyst.

However markets seem inclined to brush aside those negative factors, and USOil comes from two straight profitable weeks and runs another profitable month, helped by OPEC+ recent massive output cut plan.

This gives it the opportunity to take another crack at 94.36 and the 38.2% Fibonacci of the June high/September low slump. Bulls have recently failed to clear that level, although a successful effort can open the door for further recovery towards and beyond 98.69.