Index in focus: A50 bears in control as COVID spreads in China

Why the COVID outbreak across the country may well get worse before it gets better...

China

Global fear toward Chinese assets is growing increasingly palpable.

As my colleague Fawad Razaqzada noted yesterday, the yuan has fallen to 17-month lows near $6.60, representing a more than 3% rise in the normally low-volatility pairing of the world’s two largest economies, but the selling has been even more dramatic in equity indices.

Looking at the FTSE China A50 Index of domestic shares, prices are down nearly -40% from their highs in Q1 2021 and more than -20% from the peak in mid-December; this is among the worst returns of all global indices so far this year. While there are multiple catalysts for the continued downtrend, including a crackdown on technology companies, a real estate slump, and general risk aversion from the ongoing Russia-Ukraine conflict, the biggest issue for traders right now is the ongoing outbreak of COVID in the country.

The manufacturing and financial hub of Shanghai has been in lockdown for nearly a month, forcing businesses to close and exacerbating the global supply chain disruption. Now, traders are concerned that the same fate may befall Beijing after city authorities announced that the virus  may have been spreading in the capital for the last week, characterizing the situation as “urgent and grim.” With no imminent signs that Chinese political leaders will change the country’s “zero tolerance” policy and cases still on the rise, the outbreak across the country may well get worse before it gets better.

Technical view: FTSE China A50

As the chart below shows, the A50 index has been trending lower since peaking above 20,000 last February, reaching a low near the 78.6% Fibonacci retracement of the 2019-2021 rally around 12,400 last month. After consolidating below the 14,000 level for the past five weeks, the index has rolled over again this week and may soon re-test the multi-year lows.

A5004262022

Source: TradingView, StoneX

As the RSI indicator in the lower pane shows, prices remain firmly in oversold territory but are no longer oversold, hinting at another leg lower from here. If the two-year low at 12,400 gives way, bears may look to target COVID lows at 11,750 next. Meanwhile, traders will likely be looking for a move back above the 50-day EMA and previous highs in the 14,000 area before growing more confident that the downtrend may be coming to an end.

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