The focus now appears to have moved to step two, with senior leaders recently asking regulators to draw up a game plan for easing the circuit breaker rule. The third step would be facilitating a full return to normal aviation traffic, the people said. It’s unclear what the timeline is for the implementation of these two steps.

The State Council and CAAC didn’t immediately respond to requests for comment. Evidence China is even considering changes that would ease its global isolation would be scrutinized by investors, with Chinese equities near multi-year lows because of the economic damage wrought by Covid Zero’s snap lockdowns, testing drives and border restrictions. 

Shares of airlines, including China Eastern and China Southern, extended gains in Hong Kong on the flight ban news, while the yuan climbed in offshore trading. 

An unverified screenshot circulating on social media claiming a broad reopening plan was being considered sparked a $450 billion speculative rally in stock markets this week. Soon after, China’s top health body reaffirmed its commitment to the zero-tolerance virus approach. 

Eoin Treacy's view

Investors are interpreting the commitment to ZERO-COVID as “zero-covid” or at least they really want to reach that conclusion. Valuations are so attractive that people are latching onto any sign of reopening to repeat the rebounds seen in Western assets post March 2020. That’s particularly true of Hong Kong shares where the acceleration lower is giving way to a short covering rally.

The Chinese government is in a very difficult position. Even if we take the quarantine policy at face value, the country is experiencing its largest outbreak since May. The emergency lockdown on Shanghai Disneyland this week is a good example of that. Customers were locked inside the park and could not leave until they had a negative PCR test.  

Rather than abandon the quarantine policy, I suspect more overt efforts to support the economy are likely. The Renminbi’s rebound is a confidence boosting measure in the short term and suggests the devaluation will not be a one-way journey. That may also suggests that we are at the point of maximum pessimism towards China.
Copper surged today, posting the biggest upward dynamic since the June peak. That’s encouraging action and a sustained move back above the 200-day MA would confirm more than a short-term return to demand dominance.
This is the third upward dynamic for gold, all from the same level, just above $1600, since September. The internal dynamics of the range suggest support building.   

The crude oil market is so finely balanced that any potential easing of lockdowns in China would be transformative for the price action. A sustained move above $100 would resolve this short-term range on the upside and open the way for a retest of the highs.