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ASX 200 May Fall on Increasing Cases of Covid-19, Escalating US-China Tensions

ASX 200 Stock Index, Melbourne Lockdown Restrictions, Iron Ore Prices – Talking Points:

  • Deteriorating health outcomes in Victoria, Australia’s second most populous state, seem to have hampered the performance of regional risk assets.
  • Falling Chinese demand for iron ore and escalating US-China tensions may weigh on Australian stocks
  • he ASX 200 continues to struggle at key Fibonacci resistance as technical divergence suggests a near-term pullback is on the cards

Victorian Premier Daniel Andrews has re-ignited ‘stage four’ restriction concerns, as cases of the novel coronavirus surged to a fresh record high yesterday – 484 daily new cases – despite the re-imposition of lockdown measures on July 7.

With an incubation period of approximately 14 days, Chief Health Officer Brett Sutton flagged that “the effect of the stage three restrictions across metro Melbourne and Mitchell shire should really have an effect in the next three to five days” in his July 12 address.

Given Sutton’s proposed timeline, a distinct plateauing of new infections should have been seen in the last few days. Granted, early signs looked promising with cases tentatively peaking at 428 on the 17th of July.

Daily Cases of Covid-19 in Victoria (June – Present)

ASX 200 May Fall on Increasing Cases of Covid-19, Escalating US-China Tensions

Source – Covid19Data

However, with the 7-day rolling average remaining elevated at 350+ new infections a day, the Premier warns that current social distancing measures and restrictions may “run for much longer” than the originally proposed six weeks.

So, what is preventing the suppression of this economically-devastating outbreak?

Frightening statistics released by the Premier highlight that “of the 3810 people who tested positive to coronavirus in Victoria between July 7 and July 21, 3400 of them did not isolate when they first felt sick or after they got a test[meaning] people have felt unwell and just gone about their business”.

Furthermore, more than 50 percent of people waiting for their Covid-19 test results flouted social distancing restrictions, continuing to work, shop and mingle with others “even though they’ve got symptoms”.

To that end, the extension of social distancing measures and lockdown restrictions may eventuate if daily new cases continue to climb over the next few days, potentially igniting a significant discounting of the risk-sensitive Australian Dollar and ASX 200 stock index.

Falling Iron Ore Supply, Lack of Demand May Anchor Regional Risk Assets

ASX 200 May Fall on Increasing Cases of Covid-19, Escalating US-China Tensions

Data Source – Bloomberg

Falling demand for Australian iron ore exports may also hamper the performance of the Australian benchmark index as Chinese demand has notably fallen from the highs of May.

Sliding lower, in tandem with Australian exports, suggests that the mining-heavy ASX 200 could be at risk of further declines should this negative trend continue. That industry accounts for neary 20 percent of the overall index.

Moreover, escalating tension between the “Five Eyes” alliance – the US, UK, Canada, New Zealand and Australia – may exacerbate the recent decline in trade with China, Australia’s largest trading partner, after the Trump administration ordered the closure of the Chinese Consulate in Houston. It vaguely cited intellectual property threats as the primary reason behind the order.

Clearly these developments will need to be monitored in the coming weeks and may dictate the future direction of the ASX 200 stock index, potentially fueling a sustained decline should the current situation deteriorate further.

ASX 200 Daily Chart – Fibonacci Resistance Suppressing Bullish Potential

ASX 200 May Fall on Increasing Cases of Covid-19, Escalating US-China Tensions

ASX 200 daily chart created using TradingView

From a technical perspective, the ASX 200 index’s outlook remains skewed to the downside as resistance at the 61.8% Fibonacci continues to diffuse bullish potential.

A tentative test of resistance at the 200-day moving average (6,236) was met with a wave of fresh selling pressure as price failed to close above the psychologically pivotal 6,200 level.

With the RSI struggling to climb back into overbought territory, it seems as though the path of least resistance continues to be lower, as fading volume suggests a lack of bullish impetus.

A daily close below the 50% Fibonacci (5,792) would probably result in a sustained decline back to the 38.2% Fibonacci (5,461) and potentially signal a resumption of the yearly downtrend.

Conversely, a break and close above the 61.8% Fibonacci (6,124) and June high (6,198) may ignite a surge to test the March high (6,524), should buyers successfully overcome sentiment-defining resistance at the 200-day moving average (6,236)

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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