Daily Market Comment – New virus variant hits riskier assets, revives yen



  • Worries around a vaccine-resistant variant spark turmoil 
  • Stocks and commodity currencies slide, yen comes back to life
  • We’ve seen this movie before, but there’s a catch this time
Covid strikes back

A new virus variant has come like a bolt out of the blue to rattle financial markets. The underlying concern is that vaccines may be less effective against this ‘Nu’ variant and it may spread easier thanks to its high number of mutations. The jury is still out though, as there isn’t much data available yet. 

Of course, markets aren’t going to wait around until all the details are known. Traders are already running for cover, slashing their exposure to stocks and loading the truck with bonds.

European equity indices are down by roughly 3% while the S&P 500 is set to open 2% lower according to e-mini futures. The tech-heavy Nasdaq is holding up better. It is mostly ‘real economy’ stocks that are getting hammered, with the drop in yields also cushioning the blow in the tech complex. 

In the FX battlefield, the yen is back in vogue as bond yields drop back and carry trades get unwound. On the other side of this coin are the commodity-linked currencies like the Australian and New Zealand dollars, which are suffering collateral damage from worries around global growth. 

Just another dip to buy? 

Investors have seen this movie before. The drill is that panic engulfs markets once a new variant is discovered, but ultimately the winning strategy has been to ‘buy the dip’ as central banks and governments ride to the rescue.

There may also be an element of overreaction this time, with thin liquidity conditions due to the US Thanksgiving break exacerbating the selloff. Nobody really wants to be loaded up to the brim with riskier assets ahead of the weekend either, and be exposed to even worse headlines come Monday. 

Here’s the real risk: the Fed doesn’t have much room for helping markets out when inflation is already running above 6%. Sure, tapering may not be accelerated and one rate increase might be priced out for next year, but would that be enough to soothe markets? The ‘Fed put’ is not what it used to be.  

Dollar undecided, oil gets smashed

The dollar has been caught between opposing forces, with the slide in yields diminishing its interest rate advantage but its reserve currency status sending some safe-haven flows its way. 

With fears around global growth flaring up again, oil has been the biggest casualty. Whereas earlier this week the supply side of the equation was running the show, it is now the demand picture for oil that is in the driver’s seat. 

The silver lining is that there’s an OPEC+ meeting next week, and everything that’s happened lately gives the producers the perfect excuse to slow down their planned output increases. That could provide some relief to oil prices, although the real driver will be how the demand situation unfolds. 

As for today, there isn’t much on the agenda. US markets will close early and the spotlight will naturally remain on any details around the variant that has petrified investors. It will be interesting to hear what the World Health Organization has to say about this when it concludes its meeting at 11:00 GMT. 

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