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MARKET WRAP: Reignited COVID fears causes sell off in stocks, oil and crypto

Economy58 minutes ago (Nov 26, 2021 16:38)

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Key Points

FTSE 100 closes lower by 3.7% at 7,041.6
New COVID variant weighs on global stocks
Airlines, banks, energy companies worst hit
Crude tumbles as travel restrictions reinforced
USD slips; Could variant change Fed plans?
Bitcoin falls with other riskier assets

By Samuel Indyk – A newly discovered COVID variant in Southern Africa sent global stock markets tumbling on Friday amid fears that the strain could be vaccine resistant and spread rapidly. The new variant has numerous mutations, including having a spike protein very different from the original strain that some have feared could mean the current vaccines are not as effective against it.

Currently, there is not enough data to understand whether this will be the case or not or whether the new variant is more transmissible or whether it is more dangerous.

Nevertheless, the COVID trade was back in business with airlines and energy companies weaker and pandemic plays such as Peloton (NASDAQ:PTON) and Zoom (NASDAQ:ZM) trading higher after what has been a disastrous few weeks for shares.

British Airways parent IAG (LON:ICAG) fell as much as 20% at the open in London before staging a slight recovery. Jet engine manufacturer Rolls-Royce (LON:RR) also tumbled as the UK re-enacted travel restrictions on six southern African countries, including South Africa, where the variant was first identified.

“Headlines calling it the ‘worst ever variant’ have caused investors to panic and dump shares in travel-related stocks for fear that we’re going to see tough travel restrictions once again,” said AJ Bell Investment Director Russ Mould. “This is the worst possible news for airline operators as they were just starting to see a pick-up in trading, helped by people becoming more comfortable about travelling on a plane and routes like US/UK reopening.”

Other companies in the FTSE 100 that plunged included Premier Inn owner Whitbread (LON:WTB), InterContinental Hotels (LON:IHG), and the events and exhibitions company Informa (LON:INF).

Unsurprisingly, oil companies – including BP (LON:BP) and Royal Dutch Shell PLC Class A (LON:RDSa) – were lower as oil prices declined. WTI and Brent crude futures both fell over 11% over fears that the new variant will put a halt on the demand recovery.

However, it wasn’t all doom and gloom. Pandemic plays such as online grocery delivery company Ocado (LON:OCDO) and takeaway delivery company Deliveroo (LON:ROO) were trading higher as some begin to speculate that more lockdowns could be around the corner, prompting more people to order food online.

Heading into the final day of the week, markets had been expecting the Bank of England to hike interest rates at the December meeting. The news of a new variant that could impact the recovery may see the central bank hold off from taking action.

Markets had been pricing in a 75% chance of a BoE hike yesterday but that slipped to 55% on Friday morning as the uncertainty might make the central bank enter a “wait and see” mode.

“For the latest Covid developments to have a marked impact on activity, that would probably require a reimposition of significant domestic restrictions, of which there is as yet little sign,” Lloyds (LON:LLOY) Bank analysts said in a research note. “Nevertheless, even if central banks feel that the economic outlook has probably changed very little, they may regard the situation as still uncertain enough to justify waiting a little longer before making a policy change.”

The EUR strengthened against both the USD and GBP as the policy divergence between the ECB and other central banks is unlikely to be as large in the near term as previously thought. EUR/USD rose around 1% and reclaimed the 1.1300 level while EUR/GBP looked to retest 0.8500.

Safe haven currencies, the JPY and CHF, were the notable outperformers in the currency space while the ZAR understandably weakened as countries reimposed travel restrictions to South Africa, where the variant was discovered.

Finally, cryptocurrencies were generally weak amid the broad risk-off tone. Bitcoin dropped to its lowest level since 7th October as traders rushed to the exits.

“If this new variant triggers major risk aversion in the markets, it [Bitcoin] could come under serious pressure,” said OANDA Senior Market Analyst Craig Erlam. “Unless of course, the inflation narrative catches again. No sign of it yet but, as ever with crypto, it has an incredible ability to find the bullish case in anything. Maybe this will be next.”


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