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New covid scare sparks rate rethink in markets
Risks of a new covid hit to economic activity are clobbering expectations for rate hikes next year from the world’s major central banks, a potential setback for the dollar and other currencies where wagers had been most aggressive.
Money markets no longer fully price a 25-basis-point interest rate rise by the Federal Reserve by June 2022, nor are they positioned for a full 10-bps hike from the European Central Bank by the end of 2022, as they were just a few days ago.
And the chances of the Bank of England raising rates next month are seen around 53%, from 75% on Thursday.
Those shifts come after the detection of a new coronavirus variant in South Africa triggered stricter border controls from several governments, as scientists sought to determine if the mutation was vaccine-resistant.
“While central bank commentary has been focused on upside risks to inflation, this (new covid variant) highlights that there are significant downside risks and we are in a significant phase of uncertainty for the economy,” said Chris Scicluna, head of economic research at Daiwa.
In an echo of the panic that swept markets when covid was spreading early last year, oil prices slid over 6% on Friday, travel industry shares notched up falls of 6% or more and two-year U.S. Treasury yields fell 12 bps in their biggest daily drop since March 2020.
Currency traders had been favouring the U.S. dollar and others where rate hike prospects appeared strong, driven by higher inflation and stronger economies. Now a shake-out appears on the cards