Five Things You Need to Know to Start Your Day
New Covid strain, rush to safety, and commodities plunge.
There are fears this morning about a new strain of Covid-19 that’s rapidly spreading in southern Africa. The European Union and the U.K. are already moving to halt air travel from the region. Singapore announced a similar move as governments act quickly to protect progress made in controlling the virus. Two people in Hong Kong quarantine were found to be infected with the strain. Scientists have yet to determine how quickly the new variant can spread and whether it is resistant to vaccines.
While governments are acting quickly to try to control risks from the new variant, investors are taking no chances. Stocks in Asia were on track for their worst session since March while Europe’s Stoxx 600 Index was 2.5% lower by 5:50 a.m. Eastern Time. S&P 500 futures pointed to a lot of selling pressure at the start of what would traditionally be a quiet day on Wall Street. Bonds are the big winners with sovereign yields plunging and the yield on the 10-year Treasury dropping 11 basis points to 1.528%. Gold jumped $20 to trade over $1,800 an ounce.
News of the new Covid variant did what the coordinated release of oil from global reserves could not, by causing a crash in the price of crude. A barrel of West Texas Intermediate was trading close to $73 as investors tried to price in another slowdown in international travel. Base metals are also being caught in the rush from growth-reliant assets with copper, nickel and aluminum all declining in London trading.
The other thing that is suffering a rapid reversal this morning is bets on central-bank rate rises. Traders have pushed the timing of a 25-basis-point rate increase by the Federal Reserve to September from June. Bets on Bank of England policy now see a rate hike in February rather than next month, while there is now little chance of a move from the ECB next year.
Spare a thought for anyone who convinced their relations to invest in Bitcoin over Thanksgiving turkey. The largest crypto currency has plunged more than 7.5% this morning, taking its losses from the most recent peak to more than 20%. Bitcoin has been acting more like a risk asset recently, and today’s rush to safety means the digital token got steamrolled. Despite the plunge, Bitcoin is still up more than 80% this year.
What we’ve been reading
Here’s what caught our eye over the last 24 hours.
And finally, here’s what James is interested in this morning
To hike or not, that was the story for most of the week — right up until a troubling new coronavirus variant was detected in southern Africa and cast a pall over global markets on Friday. Treasury yields slid across the curve in a broad risk-off move. But a lot is still unknown about the strain, called B.1.1.529, and it’s possible this turns out to be a scare that passes. Viruses mutate all the time: sometimes that makes them weaker, other times it makes them more adept at infecting humans. In any case, a cache of innovative vaccines and treatments is also now available.
Some G-10 central banks are increasingly embracing the need for tightening monetary policy to curb surging inflation, and it will take a lot more hard data that the new variant is a serious challenge to knock them off that course. For now, let’s sum up where these various monetary authorities stand.
- This week, the Reserve Bank of New Zealand hiked the official cash rate for a second month, taking the baton from its Norwegian counterpart, which got off the mark in September. Outside of the G-10, a slew of central banks have been raising benchmark borrowing costs too.
- In the U.S., the Federal Reserve made up ground this week after U.S. President Joe Biden decided to renominate Jerome Powell as its chief.
- Money markets are betting the Bank of England will raise borrowing costs a cumulative 110 basis points by the end of next year as concerns grow that transitory inflation becomes more entrenched.
- One laggard, though, is the European Central Bank, which is barely expected to tighten policy rates even once in 2022. A resurgence of the coronavirus pandemic in the region and uncertainty over the future of its behemoth pandemic bond-buying program, which is set to end next year, have combined to give the doves on the governing council the upper hand.
- Meanwhile, Sweden’s Riksbank signaled on Thursday its in no mood to hike for at least three years.
- I’d be remiss to not mention the Bank of Japan, which often flies under the radar amid a decades-long struggle to recover from the bursting of the bubble 30 years ago. The BOJ was the first to initiate quantitative easing, while Japanification has become a byword for chronically anaemic economic growth and feeble inflation around the globe. A case of the less said here, the better, perhaps.
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