Increasing COVID-19 Cases in China Creates Demand Fear for Markets: But Positive Longer Term

China will reopen the border with Hong Kong on Sunday for the first time in three years, as it accelerates the unwinding of stringent COVID-19 rules. Demand concerns have been intensifying with the spike in COVID-19 numbers in China and the idea the pandemic may worse before it improves. That’s been sending a negative tone across the energy sector, equities and portions of the ag markets. 

China’s efforts to normalize their economy by lifting its zero-COVID-19 policy in early December have been met with a sharp increase in COVID-19 hospitalizations and deaths. The World Health Organization received update data from China showing a nearly 50% increase in cases in the week up to Jan. 1. 

China’s GDP and other economic data is showing contraction including the December Purchasing managers Index, with the fall in output for the fourth straight month. It’s also negatively effecting energy demand. 

Darin Newsom, senior market analyst with Barchart says, "We see most of that playing out in the crude oil market and crude just collapsed to start the year. It kind of stabilized a bit on Thursday, but by and large, that seems to be where everybody gets the most excited if China continues to start up and shut down, start up and shutdown."  

For the ag markets, the China news is bearish short term due to demand concerns and China’s pork price is down 31% for December which backs that up. But it’s also throwing caution on U.S. ag markets like cotton, grains and hogs. 

Newsom says, "The big question right now is pork. We've got a lot of commercial selling hitting the pork market of late. So, I think that is a concern."    

However, longer term, China easing it’s COVID-19 restrictions after nearly three years in lockdown will translate into demand for goods, including food.  

DuWayne Bosse of Bolt Marketing says, "China breaking out of their COVID-19 restrictions is a longer-term story that's bullish to me. Everyone keeps trying to make it a bearish story short term because of the number of COVID-19 cases increasing. But then getting back to normal like we did, I think people will be out spending money and demand will grow." 

China’s demand for U.S. soybeans and meal has stayed strong throughout the pandemic, especially as the prices for soybeans are near $20 and meal has been near-record highs. 

Traders are continuing to monitor the situation and are closely watching the spread of infections during China’s week-long Lunar New Year holiday that begins on January 21. The fear is that may keep the economy from recovering.