Investors have spent the past year learning how to relax in the face of the pandemic, lulled by many stimuli and expectations that vaccines will help control the virus. That sense of calm was shattered on Friday.
Global stock markets fell the most in a year, rocked by the discovery of a new variant of the coronavirus in Botswana that has spread elsewhere. Many investors had so far ignored the rising number of infections in various countries – and the reimposition of travel bans and lockdowns in some – but Friday’s news shaken that confidence.
“A more virulent shift has always been a risk but one that the market was prepared to face,” said Michael Metcalfe, global head of macro strategy at State Street. “Whatever happens now, the market will be a little more wary and attentive to the Covid narrative. “
The market reaction was swift and severe. The FTSE All World Index fell 2.2% on its worst day since October 2020, with stock markets in the US, Europe and Asia under heavy selling pressure.
“The market was ignoring this. In the list of investor concerns, Covid had fallen relatively far,” said Paul Leech, co-head of global equities at Barclays.
“Talking to clients it feels like they don’t have enough information on this yet, so I don’t think people will be putting a lot of money into work before the weekend is over and we know more. “
Investors and analysts have pointed out that the sharpness of the moves was exacerbated by the number of people on Wall Street who reportedly took leave on Friday and by the refusal of small teams remaining at their desks to take risks before the weekend.
“You have received news that is hitting the markets at the worst possible time. . . The markets are completely illiquid thanks to the US vacations, ”said Mark Dowding, chief investment officer at BlueBay Asset Management. “It’s a dirty Thanksgiving hangover.”
Bond markets, which have recently focused on the potential for early interest rate hikes as central banks stubbornly tackle high inflation, have also changed course dramatically. Public debt rallied sharply as investors sought refuge and lowered some of their expectations for monetary tightening next year.
The US 10-year yield fell 0.16 percentage points to 1.49%, its lowest in more than two weeks. Yields in Europe also fell sharply.
As high-quality government bonds rallied as investors sought their safety, corporate debt markets have been rocked by fears that the coronavirus will continue to weigh on economic activity and hurt the economy. ability of borrowers to repay their debts.
BlackRock and State Street junk-bond exchange-traded funds – which manage a total of $ 27 billion – fell more than 0.7% in New York City to trade at their lowest level since November of l ‘last year.
Despite the potential threat of a variant of the coronavirus that could escape vaccines, investors said it was far too early to fundamentally reassess their outlook for the year ahead.
Rather, they argued that many of Friday’s moves marked a reversal for popular trades, as fund managers were forced to reduce the risk of their portfolios amid the sudden explosion in volatility.
For example, the dollar – which usually benefits in times of economic turmoil – gave up some of its recent gains against the euro and yen. For the stock markets, the losses retreated after a strong advance, and traders said the decline was orderly.
“Movements are obviously very important, but you have to remember that we are still near all-time highs for many risky asset prices,” said Mike Riddell, portfolio manager at Allianz Global Investors. “It’s not like the market is telling us we’re going back into a recession.”
Barry Norris, founder of Argonaut Capital, argued that it was too early to position himself for a larger share sale. “The gut reaction is too obvious a profession,” he said. “Next week a vaccine company will say their jab works on the new variant and you will be cut in half again.”
For now, investors are eagerly awaiting new data on the new variant, an unwelcome return to the early stages of the pandemic when fund managers have spent hours looking into infection rates.
“We’re kind of back where we were over a year ago,” said Metcalfe. “The market is going to wait for lab results again, which I think we thought we exceeded.