Stocks, oil skid as China's COVID protests roil sentiment

Stocks and oil slid sharply on Monday as rare protests in major Chinese cities against the country's strict zero-COVID curbs raised worries about management of the virus in the world's second-largest economy.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) slumped 2.2%, pulled lower by heavy selling in Chinese markets.

Hong Kong's Hang Seng Index HSI shed 4.16%, China's CSI300 Index 3399300 declined 2.22% and the yuan fell in morning trade.

"The market does not like uncertainties that are difficult to price and the China protests clearly fall into this category. It means investors will become more risk-averse," Gary Ng, Natixis economist in Hong Kong told Reuters.

"The China-linked markets across Asia, such as Australia, Hong Kong, Taiwan and Korea, are more likely to see a larger impact."

Australia's benchmark stock index XJO lost 0.56% while its currency AUDUSD was off more than 1%. Japan's Nikkei stock index NI225 was down 0.76%.

South Korea's KOSPI 200 index (.KS200) retreated 1.35% in early trade and New Zealand's S&P/NZX50 Index NZ50G was off 0.42%.

S&P 500 and Nasdaq futures both fell, pointing to possible declines in Wall Street later in the day.

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 frees up about $70 billion in liquidity to prop up a faltering economy.

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 in an attempt to quell fresh outbreaks.

"There is a tail risk that the road to living with COVID is too slow, surging COVID cases fuels more protests and social unrest further weakens the economy are market concerns," said Robert Subbaraman, Nomura's Asia ex-Japan, chief economist.

"Things are very fluid. 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, setting a more transparent timetable, and accelerating China's move to living with COVID."

The dollar extended gains against the yuan USDCNY, rising 0.87%.

The COVID rules and resulting protests are creating fears the economic hit for China will be greater than 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."

China's case numbers have hit record highs, with nearly 40,000 new infections on Saturday.

Fears about Chinese economic growth also hit commodities in Asia trade.

U.S. crude CL1! dipped 2.81% to $74.14 a barrel and Brent crude BRN1! fell 2.57% to $81.48 per barrel, as the COVID protests in top importer China fuelled demand worries.

Yields on benchmark 10-year Treasury notes US10Y rose to 3.6628% from its U.S. close of 3.702% on Friday. The two-year yield (US2YT=RR), which tracks traders' expectations of Fed fund rates, touched 4.4463% compared with a U.S. close of 4.479%.

The dollar dropped 0.3% against the yen to 138.64 USDJPY after initially trading higher earlier in the day. It remains well off its high this year of 151.94 on Oct. 21.

The euro EURUSD fell 0.5%, having gained 4.94% in a month, while the dollar index DXY, which tracks the greenback against a basket of currencies of other major trading partners, was up at 106.49.

Gold was slightly lower. Spot gold GOLD was traded at $1750.49 per ounce.