Oil price falls to 10-month low as China's Covid-19 lockdown protests fuel demand fears

Stocks and oil suffered a broad sell-off on Monday as rare protests in major Chinese cities against the country's strict zero-COVID curbs hit growth expectations in the world's second-largest economy.
Clashes between police and protesters across several major cities over the weekend halted a tentative rally in shares that gathered pace last week as hope-starved markets had seized any morsel of good news.
Europe's benchmark STOXX index slipped 0.9% on Monday after MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.2% as investors dumped Chinese shares.

Oil prices, sensitive to the strictness of China's lockdown as a barometer for demand, fell near to their lowest levels this year. Brent crude dropped 3.4% to trade at $80.8 a barrel by 1208 GMT. Euro zone government bond yields, which move inversely to prices, also ticked higher on the risks that the disturbances in China could disrupt global supply chains and further stoke inflation.
Germany's 10-year government bond yield was up 4 basis points (bps) at 2.008%, after rising 12 bps on Friday.

"Unprecedented waves of protest in China have caused ripples of unease across financial markets, as worries mount about repercussions for the world’s second-largest economy," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

"As demonstrations spread across the country from Beijing to Xinjiang and Shanghai, reflecting rising anger about the zero-Covid policy, a sustained recovery in demand across the vast country appears even further away," she said.

Fears about Chinese economic growth hit other commodities markets, with copper and other metals also falling on the protests. Some investors were puzzled by the fall in the usually safe-haven dollar against currencies like the yen and euro on Monday, with market analysts blaming falling U.S. bond yields which made the greenback less attractive against Japan's currency.

The dollar was last down 0.7% against the yen at 138.1. U.S. markets looked set to follow the bearish mood on Monday, with S&P 500 futures 0.8% lower.

The bigger worries about China's COVID policies dwarfed any support to investor sentiment from the central bank's 25 basis point cut to the reserve requirement ratio (RRR) announced on Friday, which would free up about $70 billion in liquidity to prop up a faltering economy.

China announced a fifth consecutive day of record new local cases with 40,052 infections on Monday. In Shanghai, demonstrators and police clashed on Sunday night as protests over the country's stringent COVID restrictions flared for a third day.

There were also protests in Wuhan, Chengdu and parts of the capital Beijing as COVID restrictions were put in place. Robert Subbaraman, Nomura's Asia ex-Japan chief economist, said there is a risk China's plan to live with COVID is too slow, surging COVID cases fuel more protests and social unrest further weakens the economy.

"Things are very fluid," he said. "Protests could also be the catalyst that leads to a positive outcome in leading the government to set a clearer game plan on how the country is going to learn to live with COVID."
The COVID rules and resulting protests are creating fears the economic hit for China will be greater than first expected.
"Even if China is on a path to eventually move away from its zero-COVID approach, the low level of vaccination among the elderly means the exit is likely to be slow and possibly disorderly," CBA analysts said on Monday. "The economic impacts are unlikely to be small." 

Yields on benchmark 10-year Treasury notes reached 3.6738% from its U.S. close of 3.702% on Friday. The two-year yield , which tracks traders' expectations of federal fund rates, fell to 4.4649% compared with a U.S. close of 4.479%.

Gold prices edged up, touching a one-week high of $1761 per ounce as the dollar softened and demand for alternative safe havens grew. Spot gold was last traded at $1,758 per ounce.

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