Wall Street stock indexes dropped at the open after the U.S. Thanksgiving break, Treasury yields slid and oil hit two-month lows as fears of a possibly vaccine-resistant coronavirus variant sent investors scurrying to safe-haven assets, reports Reuters.
New COVID variant
Asian and European countries rushed to tighten restrictions on Friday after a new and possibly vaccine-resistant coronavirus variant was detected in South Africa, with Singapore and India announcing stricter border controls and more rigorous testing.
“We see Germany considering a lockdown, so this new variant and flare-up in the COVID situation poses some risk to market sentiment in general”, Shinichiro Kadota, Senor FX Strategist, Tokyo. .
“The UK has paused flights from South Africa and five other neighbouring countries, and we can expect more of this elsewhere. The complacency seen with the emergence of the delta variant in India being a lesson harshly learned”, Jeffrey Halley, Analyst, Jakarta.
Impact on economy
“If the COVID situation worsens, then dollar-yen could go down further, but otherwise the monetary policy divergence is definitely going to be weighing on the yen in the medium term”, Shinichiro Kadota, Senor FX Strategist, Tokyo.
“Longer-term we are very constructive and bullish on stocks having much longer legs into 2022 with the economy reopening, supply chain issues becoming more mitigated. But one thing we have seen that has been consistent in the last year and a half has been some of these more outsized impacts or developments with respect to Covid really has been the one thing that has shaken the markets to a greater extent”, Greg Bassuk, CEO, AXS Investments Ports Chester, New York.
Scotiabank Strategists
Given that COVID has hardly been contained globally at this point and that we do not yet know whether this new variant, with all its mutations, is a greater threat, the market’s reaction seems a little excessive.
But investors are prone to shoot first and ask question later and not stand in the way of these sorts of position unwinds. The process may have a little further to run. Recall that seasonal trends for the U.S. dollar tend to turn more negative in December; market volatility might be the sort of cover markets need to lighten up on (rates and dollar) positioning now and reassess prospects in January.
RBC capitol markets
It is the threat of vaccine escape that causes the market reaction in both equities (down) and bonds (up).
As long as markets are faced with a familiar virus situation that can be overcome with a sufficiently crafted and executed vaccination strategy, the reactions will be muted, as we have seen with the short-lived bond market rally last week when new lockdowns were announced in Europe.
This new variant, however, creates a potential threat to the known responses and thus creates a more lasting market response.
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Source: Reuters
