World markets volatile as new virus strain rattles investors

London — European shares fell 2% on Monday, the dollar strengthened and market volatility surged amid growing unease over the economic impact of a new coronavirus strain in Britain which has seen several European countries shut their borders to the UK.

The news of the new strain, said to be up to 70% more transmissible than the original, has put some 16-million Britons under tougher lockdowns and has overshadowed US lawmakers’ agreement over a long-awaited stimulus bill.

Prime Minister Boris Johnson will chair an emergency response meeting to discuss international travel and the flow of freight in and out of Britain.

Coinciding with the lack of a post-Brexit trade deal ahead of the December 31 deadline, those developments sent the pound almost 2% lower at $1.3272. Losses of more than 1% on UK equities were led by 6%-7% tumbles at banks Lloyds and Barclays.

German shares fell about 2%, while pan-European travel and leisure stocks lost more than 5% .

MUFG analysts noted the tougher restrictions might have to remain place for months until more people are vaccinated. “As a result, the economic slowdown will prove deeper and extend further into 2021. It will dampen optimism over a stronger economic recovery in 2021,” they told clients, noting this setback could necessitate more monetary stimulus.

Volatility, a measure of price swings on an asset class, swung higher across the board, with Wall Street’s “fear gauge” the Vix — rising above 25% for the first time since December 11.

Implied overnight sterling volatility hit approached nine-month highs

Earlier, Asian shares excluding Japan dipped 0.2% after hitting a string of record peaks last week. Japan’s Nikkei shed 0.4%, off its highest since April 1991.

Futures for the S&P 500 were down 0.6%, despite opening stronger after US Senate majority leader Mitch McConnell said an agreement had been reached by congressional leaders on a roughly $900bn Covid-19 relief bill.

The setback could upend bullish bets on commodities such as oil and copper, which were expected to benefit from a growth upswing in 2021.

Brent crude futures dropped more than 3% while copper, a key economic growth barometer, fell off the $8,000/tonne mark it recently scaled for the first time since 2013.

“Investors’ rosy expectations for 2021 have suddenly vanished due to a new variant of the virus,” Kazuhiko Saito, chief analyst at commodities broker Fujitomi, said.

Dollar time

The risk-off picture provided a boost to safe-haven assets, from government bonds to gold to the dollar. Speculators who had taken bearish dollar positions to the biggest since September, trimmed those in the week to December 15, data showed on Friday

The dollar index rose as high as 90.68, up almost half a percent, well off last week’s 89.723 level that marked the lowest since April 2018.

The euro edged lower at $1.222 while the yen firmed slightly at ¥103.5 per dollar.

The dollar also found support from a Nikkei report that Japanese Prime Minister Yoshihide Suga had told officials to ensure the dollar did not fall below ¥100.

Gold prices, meanwhile, climbed to six-week highs at $1,896/oz  while US and German bonds rallied, with yields down three to four basis points.

The US two-year/10-year treasury yield curve, another important gauge of growth expectations, flattened a touch. The curve had steepened on Friday to the highest levels in almost three years amid optimism about the stimulus bill.

Reuters