Asian markets were defensive in early deals on Tuesday amid fears of US-China trade tensions reigniting and the reopening of economies fraught with risk of a second wave of infections.

The Chinese city of Wuhan has reported new infections after it released the lockdown, as did South Korea, where a nightclub was the source of new infections. Russia is also reporting a rise in new cases, although many countries in Europe are easing restrictions amid a fall in infections.

Japan’s Nikkei 225 edged 0.2% lower and Australia’s S&P ASX 200 is down 1.4%. Hong Kong’s Hang Seng benchmark is off 1.43% and China’s CSI 300 share index is 0.2% lower.

Meanwhile, China reported a sharp fall in consumer and producer price inflation, an indication of the challenge that authorities are facing in lifting demand as they reopen the world’s second biggest economy.

China’s factory gate prices fell 3.1% in April compared with a 1.5% fall in March. This was more than the 2.6% expected by analysts polled by Reuters. Consumer price inflation fell to 3.3% from 4.3% in March, compared with a Bloomberg consensus of 3.7%.

“Weak employment conditions and a sharp downturn in external demand are likely to weigh on demand-side price pressures for some time,” Julian Evans-Pritchard, a senior China economist at Capital Economics, said.

“What’s more, food and energy price inflation should continue to fall in the months ahead and pull headline inflation down further. That should remove any concerns the PBoC has about the impact of monetary easing on inflation. If anything, lower inflation will increase real interest rates and strengthen the case for further rate cuts,” he said.

That should bode well for increased debt issuance with Standard Chartered projecting an increase in government bond supply, which may exceed 14 trillion yuan this year because of wider budget deficit and special bond issuance.

“We expect the CGB yield curve to bear-steepen further in the near term on a likely sharp rise in supply and improving high-frequency economic data. In the medium term, we see China rates falling further given subdued growth, ongoing monetary policy easing, declining inflation, and a reduced supply shock,” Becky Liu and Jeffrey Zhang, strategists at Standard Chartered Bank, said in a note.

Credit markets are also in a risk off mode with the Asia IG index trading 2 basis points wider at 118/120, while sovereign CDS moved out by 1-3 basis points.

Still some issuers are braving market conditions, with India’s state-backed REC Ltd looking to price a 3-year bond which has drawn strong investor interest, bankers close to the deal said. 

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