Stocks, oil price decline on fear of new worrying Covid strain

Concerns that a new Covid-19 variant discovered in South Africa could spread have Asian stocks and US equity futures on the decline, with crude prices dropping as well. WHO expects it will take weeks to shed light on the new variant. Updated.

Photo: Stf Ed Wray/AP/Ritzau Scanpix

Investors dumped risk assets and flocked to havens Friday as a new variant of the coronavirus made its presence known in global markets.

Fears the variant first discovered in South Africa may spread internationally – thwarting the global economic recovery – pushed Treasuries and the yen higher while the rand fell to its lowest in a year. Asian stocks and U.S. equity futures dropped amid the risk-off tone and crude oil retreated.

While researchers are yet to determine whether the B.1.1529 variant is more transmissible or lethal 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 precautionary measure. Hong Kong confirmed two cases of the new strain in travelers arriving in the city, the government said Thursday evening.

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

"There is some risk off happening from Japan to Africa due to concerns around a new virus variant being found in South Africa but the good thing is countries such as U.K. are acting fast to curtail its spread," said Justin Tang, head of Asian Research at United First Partners. "Given that the world has gone through this before with Delta, there is already a playbook for such situations - even if the new variant overstays."

The 10-year Treasury yield – the global bond benchmark – dropped as much as 9 basis points to 1.54 percent as cash trading resumed following the holiday. The yen climbed as much as 0.7 percent, while a gauge of expected volatility in the S&P 500 pushed higher. Emerging-market currencies, including the rand, Mexican peso and Turkish lira, slumped more than 1 percent.

Travel shock

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

OPEC+ meets Dec. 2 to decide output for January following the unprecedented move by the US and other nations to tap strategic stockpiles to tame rising energy prices.

Meanwhile, a Bloomberg-compiled basket of Asian stay-at-home shares – including video games, internet services and health-care names – outperformed in early trading.

Frayed nerves

Global investor nerves were already frayed this week amid concern over the withdrawal of stimulus from the Federal Reserve and the seemingly relentless rise in inflation. High-priced tech stocks had come under pressure, cryptocurrencies saw increased price swings and the cost of downside protection on the S&P 500 pushed higher.

Friday's risk-off move even seeped into trader bets on Fed rate hikes next year, with December's 2022 Eurodollar futures knee-jerking higher – a sign of slightly reduced expectations. Still, the advance is only a reversal of this week’s drop which was dominated by relatively hawkish comments from Fed officials.

Thin liquidity

The impact of the US holiday may have exacerbated early moves. Volumes in US equity futures were about 10 percent behind their 30-day average as of noon in Tokyo, as was activity in Hang Seng members.

"The risk-off sentiment is magnified given the thin liquidity as it’s Asia morning plus the U.S. holiday," said Alvin T. Tan, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong.

Travel restrictions

The first countries have already shut down access to people from South Africa: the UK, Israel and Singapore. Friday, EU Commission President Ursula von der Leyen said the Commission will enact a similar travel ban.

"The EU Commission will propose, in close coordination with Member States, to activate the emergency brake to stop air travel from the southern African region," von der Leyen wrote on Twitter.


ShippingWatch Update

WHO: Assessing new variant will take weeks

The World Health Organization (WHO) expects it will take weeks to shed light on the new variant of the virus that was discovered in South Africa.

WHO is also cautioning against introducing new travel restrictions, as experts meet in Geneva to assess the new variant.

WHO says that almost 100 sequences of the variant known as B.1.1.529 have been discovered, sparking serious concerns around the global.

"The WHO meeting has been called to gain a better overview of deadlines for investigations and a study being launched to determine the extent to which the new variant should be a cause for concern," says a WHO spokesperson.

The South African Ministry of Foreign Affairs calls it "rushed" for the UK to introduce travel bans from South Africa and five other African nations following the discovery of a new Covid-19 variant.

"The decision [...] seems to have been rushed as even the World Health Organization is yet to advise on the next steps," the ministry notes in a statement issued Friday.

As a result of the concerns about the new variant, which sent the oil price tumbling down. At the time of writing, the Brent benchmark is down by around five percent, as is the West Texas Intermediate (WTI).

(The article has been updated Friday November 26, 2021, at 15.15 CET with supplementary information on the Bloomberg article)

English Edit: Christoffer Østergaard

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