Global Markets View - Nov 29, 2021
2-min read to stay updated on global markets and become better investors
* Omicron, the new Covid variant, has shown rapid propagation in South Africa, although because this is off a very low base. Some of the cases have been amongst vaccinated people also. The most important factor to watch is the transmissibility of the variant and cases have been found in a few countries. Several countries have already restricted flights, which means their local experts think there is a risk. There is no evidence yet of the virus being more virulent than other variants so far. The variant has 32 mutations in the spike region due to which it could reduce vaccine effectiveness. But it is quite possible that protection against severe disease will hold among the vaccinated.
* Over the next 2 weeks, we should get more data on the effectiveness of existing vaccines and upcoming antiviral pills and sprays, as well as modelling exercises simulating the spread of the virus. We will probably also get a wave of news from various countries about spread of this new variant as a wave of cases, mainly among the unvaccinated, can be expected. Moderna has said it would be able to get a new vaccine construct into human trials in less than 60 days, while manufacturing would ‘take a few months’.
* After Powell’s re-appointment as US Fed Chair and Brainard’s nomination for Vice Chair drove treasury yields to six-month highs, fears of another Covid-induced global slowdown has brought yields back to November lows. US 10-yr is back at 1.48% and the Dollar Index weakened to 96.1. Markets will now shift their focus towards how the Fed will respond to an evolving situation around the new Covid variant and whether this could dismantle the current timeline for tapering. The S&P 500 banks index dived 5% on Friday as market has pushed back the expected timing of a first 25-bps rate increase by the Fed to Sep’22 from June, while pricing out any more hikes until 2023.
* On the positive side, consumer spending remains strong reflecting in retail sales and company earnings. And there are signs globally pointing to an easing of the supply chain crisis: a) Shipping freight rates are falling by ~20% and global freight rates have fallen for eight consecutive weeks b) Major US retailers are already stockpiling goods for the holiday season c) Backlogs at major ports are down from record highs, d) Chinese manufacturing is powering up toward normal capacity following an electricity crunch e) COVID-related factory closures have let up in Southeast Asia f) US manufacturing output reached its highest level since March '19.
* On the other side, the resurgence of Covid cases across European countries, the potential threat of the new variant spreading, and high valuations remains concerns. Over the next few weeks, the key debate is likely to revolve around lockdown and travel restrictions.
* US markets were down more than 2% on Friday with the Russel Smallcap index down 3.6%. VIX shot up 55% to 28.6 indicating risk aversion. In Europe, the Stoxx 600 closed down 3.7%. Despite being in the early innings of processing news of this Covid variant, it seems as though many global investors were quick to pull out the ‘Covid playbook’ from 2020, with Pharma & Healthcare and WFH names were up more than 5% and re-opening names, especially travel and leisure names, ended down 8-12%. Brent crude fell 11.5% to $72.7. Gold was flat at $1,788.
* In India, Nifty crashed ~3% on Friday as the new Covid variant spooked investor sentiments. All sectoral indices except Nifty Pharma and Healthcare were in the red. Realty and Metal indices fell over 6%, while oil & gas, power, auto, bank and capital goods indices fall 3-4%. Mid and Small Cap Indices fell 3-4%. From the top, indices have corrected 8%-10%. Opening up trades crashed 5-10%.
Source: ABSLAMC Research