- Fears of new Covid variant spook markets
- Re-opening stocks such as airlines sell off heavily
- Too early to tell what it could mean for interest rates and more
Markets
Red across the board early doors, but have we not been here before? Stock markets fell sharply in early trade, taking the cue from a deeply negative session in Asia as fears a new Covid variant will lead to fresh lockdowns, mobility restrictions and lower economic growth. Travel stocks are taking a hammering on threats that this could lead to a series of downgrades for 2022 forecasts. Oil stocks are falling in sympathy with the decline in oil prices, on closely related fears about reduced mobility but also a more pessimistic economic outlook if the variant is as problematic as some fear. Already after the first hour we are seeing a big paring of early losses and it does rather look like an overly aggressive kneejerk, not helped by the holiday in the US yesterday thinning out some liquidity. From Jay Powell’s renomination seeing yields pop to today’s risk-off bonanza, a week is a long time in the markets…
FTSE 100 down 3.5 per cent at the lows but pared early losses and now trades –2.8 per cent, 50pts off its lows. DAX similarly down 3.6 per cent but now –3 per cent and 130pts off the lows. CAC in Paris off by 4.5 per cent early doors but coming back in to trade –3.7 per cent. But the major bourses are only back to where they traded in October when they were just picking up some momentum after the August-September decline, which if you recall had something to do with a Covid variant that was spooking investors: Delta. The quick reaction to banning travel from affected regions is in sharp contrast to the way things were handled previously with Delta, and offers some encouragement.
Travel stocks lead the decline across Europe – IAG (IAG) down 11 per cent, TUI (TUI)–11 per cent, EasyJet (EJ) –13 per cent, Rolls Royce (RR) –11 per cent etc. Again trading some way off their lows after an hour of trading. Oil stocks also declined sharply as crude prices sank, with Shell (RDSA) –6 per cent, BP (BP) –7 per cent.
Banks are falling on lower yields, fears for economic outlook.
WTI sinks to $73, down 14 per cent from the recent highs; Brent to $78 – down about 9 per cent from recent peak.
Guess who’s up? Lockdown winners Ocado (OCDO) and Just Eat Takeaway (JET) are the only risers on the FTSE 100 this morning. HelloFresh (HFG) up in Frankfurt by 6 per cent for same reasons.
Yields are down – US 10s back to 1.51 per cent. 2s also down sharply, about 10bps for the worst one-day decline since March.
In FX havens like the Swissy, Yen are bid, commodity currencies are offered with AUDUSD sinking to 71 to test the Aug low. USDCAD up to 1.276 to test the Sep high. GBP also under a lot of pressure still as likely BoE now averse to a hike. USD overall a tad lower with competing pressures on either side. EURUSD is higher.
Lower yields boosting gold, back above $1800; Bitcoin not providing much of a hedge as it falls to the $55k area. Industrial metals down, with copper –3 per cent or so.
US futures down hard after the Thanksgiving holiday – after steep selling in some of the big tech/lockdown winners like Zoom (0A1O), Peloton (PTON) etc in recent sessions there is scope for these to bounce, whilst the energy and financial components will come under pressure, though travel stocks will be worst affected.
What does the sharp selloff mean?
First there are immediate travel restrictions on southern Africa – Hong Kong has reported positive cases. The rand fell – USDZAR jumping to 16.3, the weakest the rand has been in a year. SA-exposed names like Standard Chartered and Old Mutual off 6 per cent.
Travel stocks are clearly the most exposed, but so too banks and energy – the big cyclical plays that have driven gains this week and are seen doing well in 2022. Tougher outlook? We shall see but there is clear exposure to any travel restrictions even if the variant does no other economic damage.
Make of this what you will – but should IAG and TUI really be down YTD? Looks like an overreaction so far.
Fears that a vaccine-evading variant could sweep through Europe, which is already facing a tough winter, have spooked the market, but this could be a buying opportunity for some beaten-down names. Ultimately stocks have performed well despite the pandemic and gaps have been closed after any sell-off – though how long it takes and much further the market goes down is the key question for timing. The Delta variant weighed on sentiment in Aug-Sep, leading to a pullback/correction in indices, until it was clear the risk had subsided – we could be in for a similar period of underperformance amid a risk averse outlook – until there is more data and clarity around the variant.
We’ve had a good run up since Oct – so far this decline is not even testing the October lows in the main markets. Look for DAX to go to 15,000, a big horizontal support, before we consider being a correction.
Does the variant steal the Santa Rally, or just make it more likely now there are better entry points for investors who’d been waiting for their chance?
Lots of de-risking going on across portfolios away from names exposed to cyclical growth etc, but there is not yet strong evidence that the variant will lead to lower economic outlook yet. Current situation favours quality tech, oversold software, high beta stocks that were smacked down by the pop in yields this week.
Central banks are watching – any sign of stress in financial markets on real economic worries will be the excuse to stop tightening, which could offer support to equities by lowering yields.
Near-term this could provide the cover for the Bank of England not to raise rates next month – watching GBP come under a lot of pressure this morning, with cable making a new YTD low at 1.3277, but coming back now to trade flat at 1.3310.
It could also stop the Fed from potentially increasing the rate at which it tapers QE.
Neil Wilson is the Chief Market Analyst at markets.com
