Friday, January 21

Nervous week for markets ends with wild swings in new Covid strain

Investors ditched risky assets and flocked to havens on Friday when a new variant of the coronavirus made its presence known in global markets.

Fears that the variant first discovered in South Africa could spread internationally, thwarting the global economic recovery, pushed Treasuries and the yen higher, while the rand fell to its lowest level in a year. Asian stocks and US stock futures fell amid the risk-reducing tone and crude oil fell back.

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Read: UK Stops Flights From South Africa Over Covid Variant Concerns

While investigators have yet to determine whether variant B.1.1529 is more transmissible or deadly than previous ones, authorities around the world have been quick to act. The UK and Israel temporarily banned flights from South Africa and five neighboring countries as a precaution. Hong Kong confirmed two cases of the new strain in travelers arriving in the city, the government said Thursday night.

That was enough to push traders to act first and ask questions later, given the lack of information on the variant.

“There is some risk of it happening from Japan to Africa due to concerns about the discovery of a new variant of the virus in South Africa, but the good news is that countries like the UK are acting quickly to reduce its spread,” said Justin Tang, Asia Research Director. at United First Partners. “Since the world has been through this before with Delta, there is already a manual for such situations, even if the new variant stays longer.”

The yield on 10-year Treasuries, the global benchmark for bonds, fell as much as 7 basis points to 1.56% as cash trading resumed after the holidays. The yen rose as much as 0.6%, while an indicator of expected volatility in the S&P 500 rose.

Travel shock

Airlines and other travel stocks in Asia were among the biggest declines as traders reacted to the prospect of new flight restrictions. Oil retreated as the new strain raised concerns about the outlook for energy demand before the Organization of the Petroleum Exporting Countries and its allies meet next week on its production policy.

OPEC + meets on December 2 to decide on January production following an unprecedented move by the United States and other nations to tap into strategic reserves to control rising energy prices.

Meanwhile, a basket compiled by Bloomberg of Asian keep-at-home stocks, including video games, Internet services and healthcare names, fared better in early trading.

Frayed nerves

The nerves of global investors were already strained this week amid concerns about the withdrawal of stimulus from the Federal Reserve and the seemingly relentless rise in inflation. High-priced tech stocks had been under pressure, cryptocurrencies saw a surge from price swings, and the cost of protection to the downside on the S&P 500 rose.

Read: SA detects a new variant of Covid-19, the implications are not yet clear

Friday’s risk-reducing move even leaked into traders’ bets on the Fed’s rate hikes next year, with December 2022 Eurodollar futures instinctively rising, a sign of slightly lowered expectations. Still, the advance is just a reversal from this week’s slide that was dominated by relatively aggressive comments from Fed officials.

Fine liquidity

The impact of the holidays in the United States may have exacerbated the first movements. US stock futures volumes were about 10% below their 30-day average at noon in Tokyo, as was activity in Hang Seng members.

“The no-risk sentiment is magnified given the tight liquidity as it is Asia morning plus the US holiday,” said Alvin T. Tan, director of Asia foreign exchange strategy at RBC Capital Markets in Hong Kong.

© 2021 Bloomberg

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