As Covid renews its broad spread
Investors have started to shed
Their risk appetite,
To bears’ great delight,
And snap up more havens instead
Risk is off this morning on a global basis. Equity markets worldwide have fallen, many quite sharply, while haven assets, like bonds, the yen and the dollar, are performing quite well. It seems that the ongoing increase in Covid infections, not only throughout emerging markets, but in many developed ones as well, has investors rethinking the strength of the economic recovery.
The latest mutation of Covid, referred to as the delta variant, is apparently significantly more virulent than the original. This has led to a quickening of the pace of infections around the world. Governments are responding in exactly the manner we have come to expect, imposing lockdowns and curfews and restricting mobility. Depending on the nation, this has taken various forms, but in the end, it is clearly an impediment to near-term growth. Recent examples of government edicts include France, where they are now imposing fines on anyone who goes to a restaurant without a vaccine ‘passport’ as well as on the restaurants that allow those people in. Japan has had calls to cancel the Olympics, as not only will there be no spectators, but an increasing number of athletes are testing positive for the virus and being ruled out of competition.
A quick look at hugely imperfect data from Worldometer shows that 8 of the 10 nations with the most reported new cases yesterday are emerging markets, led by Indonesia and India. But perhaps of more interest is that the largest number of new cases reported was from the UK. Today is ‘Freedom Day’ in the UK, where the lockdowns have ended, and people were to be able to resume their pre-Covid lives. However, one has to wonder if the number of infections continues to rise at this pace, how long it will be before further restrictions are imposed. Clearly, market participants are concerned as evidenced by the >2.0% decline in the FTSE 100 as well as the 0.45% decline in the pound.
While this story is not the only driver of markets, it is clearly having the most impact. It has dwarfed the impact of the OPEC+ agreement to raise output thus easing supply concerns for the time being. Oil (WTI – 2.75%) is reacting as would be expected given the large amount of marginal supply that will be entering the market, but arguably, lower oil prices should be a positive for risk appetite. As I indicated, today is a Covid day. The other strong theme is in agricultural products where prices are rising in all the major grains (Soybeans +0.6%, Wheat +1.4%, Corn +1.7%) as the weather is having a detrimental impact on projected crop sizes. The ongoing drought and extreme heat in the Western US have served to reduce estimates of plantings and heavy rains have impacted crops toward the middle of the country.
With all that ‘good’ news in mind, it cannot be surprising that risk assets have suffered substantially, and havens are in demand. For instance, Asian equity markets were almost universally in the red (Nikkei -1.25%, Hang Seng -1.85%, Shanghai 0.0%), while European markets are performing far worse (DAX -2.0%, CAC -2.0%, FTSE MIB (Italy) -2.9%). US futures are all pointing lower with the Dow (-1.0%) leading the way but the others down sharply as well.
Bonds, on the other hand, are swimming in it this morning, with demand strong almost everywhere. Treasuries are leading the way, with yields down 4.7bps to 1.244%, their lowest level since February, and despite all the inflation indications around, sure look like they are headed lower. But we are seeing demand throughout Europe as well with Bunds (-2.4bps, OATs -2.0bps and Gilts -3.6bps) all well bid. The laggards here are the PIGS, which are essentially unchanged at this hour, but had actually seen higher yields earlier in the session. After all, who would consider Greek bonds, where debt/GDP is 179% amid a failing economy, as a haven asset.
We’ve already discussed commodities except for the metals markets which are all lower. Gold (-0.35%) is not performing its haven function, and the base metals (Cu -1.7%, Al -0.1%, sn -0.7%) are all responding to slowing growth concerns.
Ahh, but to find a market where something is higher, one need only look at the dollar, which is firmer against every currency except the yen, the other great haven. CAD (-1.2%) is the laggard today, falling on the back of the sharp decline in oil and metals prices. NOK (-0.9%) is next in line, for obvious reasons, and then AUD (-0.7%, and NZD (-0.7%) as commodity weakness drags them lower. The euro (-0.25%) is performing relatively well despite the uptick in reported infections, as market participants start to look ahead to the ECB meeting on Thursday and wonder if anything of note will appear beyond what has already been said about their new framework. In addition, consider that weakness in commodities actually helps the Eurozone, a large net importer.
In the EMG space, it is entirely red, with RUB (-0.75%) leading the way lower, but weakness in all regions. TRY (-0.7%), KRW (-0.7%), CZK (-0.55%) and MXN (-0.5%) are all suffering on the same story, weaker growth, increased Covid infections and a run to safety and away from high yielding EMG currencies.
Data this week is quite sparse, with housing the main theme
|Existing Home Sales||5.90M|
|Friday||Flash PMI Mfg||62.0|
|Flash PMI Services||64.5|
The Fed is now in their quiet period, so no speakers until the meeting on the 28th. Thursday, we hear from the ECB, where no policy changes are expected, although further discussion of PEPP and the original QE, APP, are anticipated. So, until Thursday, it appears that the FX markets will be beholden to both exogenous risks, like more Covid stories, and risk sentiment. If the equity market remains under pressure, you can expect the dollar to maintain its bid tone. If something happens to turn equities around (and right now, that is hard to see) then the dollar will likely retreat in a hurry.
Good luck and stay safe