All thoughts of recovery, inflation and monetary policy tightening were put to one side this week, as investors were rudely reminded that we remain in a global pandemic. The emergence of the Covid mutation B.1.1.529, first identified in Botswana, had governments racing to introduce travel restrictions, with Israel and the UK amongst the first to stop incoming flights from a number of southern African countries.
The concern is that this new variant, in the space of less than two weeks, now dominates all new infections in South Africa, with the effectiveness of vaccines presently unknown. The R value, or the effective transmission rate, is currently at 2 where it was first identified in South Africa, with anything above 1 indicating exponential growth.
As of 12pm on Friday, London time, European equities were down 3.5% over the week, having already fallen prior to Friday due to several European countries reintroducing restrictions to combat rising Covid cases. UK equities lost 1.9% over the week, having suffered a fall of 2.7% on Friday.
Japanese stocks fell 2.9% over the week, whilst the Australian market dropped 1.6%. Emerging markets fell 1.1%, however, many markets do not open until the afternoon London time. Amongst those whose time zone had opened in the morning, India was down 4.2%, whilst Hong Kong stocks fell 3.9%. Similarly, the US stock market has yet to open on Friday, having recorded returns of 0.1% for the week to Thursday’s close. Whilst US technology stocks were down 1.3%, but this reflects rising expectations of monetary policy tightening in the US, rather than concerns over the new Covid variant.
Prior to Friday, the latest data for the US Federal Reserve’s (Fed) preferred measure of inflation was released for the year to October, with the core PCE index (Personal Consumption Expenditure, excluding food and energy) coming in a 4.1%, higher than the previous month’s recording of 3.7%, and the highest level in three decades. However, the market flipped from concerns over inflation and tightening monetary policy, towards fears of further lockdowns by Friday.
Government bonds, which had been selling off earlier in the week, rallied. 10-year US Treasury yields, having touched a high of 1.68% intraweek, were back down at 1.52% on Friday. It was a similar story elsewhere. German bunds, having climbed to a yield of -0.21%, fell to -0.32% whilst UK Gilts, which had risen to 1.04% on Wednesday, were back down to 0.85% by Friday.
Gold rallied on Friday, after selling off earlier on in the week on the back of various Fed officials pointing towards a faster reduction in the bond-buying programme in the face of rising inflation. Having hit a low point of $1,780 intraweek, it is now trading at $1,814 an ounce, although this still represents a loss of just over 2% for the week.
Crude oil also fell sharply, with Brent crude now trading at $77.5 a barrel, having almost touched $83 mid-week. Similarly, US WTI (West Texas Intermediate) is trading back down at $73.1, having peaked at slightly over $79 on Wednesday.
Since the pandemic began, Covid mutations have always been a key risk for the global economy. Those stocks most at risk from economic lockdowns are likely to take the most pain once again whilst vaccine efficacy against this new variant is established. Travel stocks, amongst many others, being the most obviously at risk. However, we must not lose sight of how effective the vaccination effort has been to date, both in terms of efficacy and speed of delivery.
Further to this, companies such as Astra Zeneca and Pfizer have repeatedly said that should a mutation arise that evades vaccines, it would not be that difficult or long-winded to reformulate vaccines against new variants. Therefore, although we can not rule out further lockdowns, we can be reasonably confident that the length of any future restrictions and the economic damage would be commensurably less than that experienced during 2020. Markets often overreact, both to the downside as well as the upside, and we will be mindful of opportunities that this period may produce.
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