New COVID strain shakes the market, is it downhill from here?

New covid strain shakes the market, is it downhill from here?

The discovery of a new covid variant in South Africa, the B.1.1.529 strain, has rattled the markets, reminding investors that COVID risks still exist.

The new strain is the most heavily mutated strain so far and is according to scientists significantly different from the original virus which emerged in Wuhan. Some of these changes in the virus mean that vaccines, which were designed using the original covid may not be effective.

So not only could some of these mutations mean that B.1.1.529 spreads faster, it could also be resistant to current vaccines.

The British government has been quick to put several southern African countries on the red travel list until more is known about this potentially very concerning variant.

However, it is also worth noting that some variants, which looked bad on paper didn't take off.

How has the market responded and what to watch going forward?

Indices

The news has shaken the markets with risker assets being dumped for safe havens. In Europe the FTSE and the DAX are on track to book the worst daily performance this year. US indices are extending the pull back from all-time highs. Given the Thanksgiving break, thin volumes and overstretched valuations perhaps a pullback wasn't so surprising.

Riskier assets such as stocks could struggle to rebound until more is known, the key question being whether it is vaccine resistant? Also let’s not forget this year has been a strong year for stock indices, and this news could be the perfect excuse to book profits for the year. That said investment banks such as Goldman Sachs are telling clients to buy the dips.

Interestingly this selloff came as our clients were starting to adopt a more bullish take on the DAX with the percentage of our clients in long positions rising from just 11% 7 days ago to 51%.

Looking at the DAX chart the sell off broke through the 50 sma negating the near term uptrend and then moved briefly below the 200 sma but buyers have appeared once again before the key 15,000 mark..A close below the 200 sma could open the door to 14,800 the October low beyond which sellers could gain momentum.

Sectors

The COVID trade could be back in play. Travel and tourism stocks are unsurprisingly the biggest fallers as travel restrictions are applied, with British Airways owner AIG tumbling over 12% at one point. Some travel stocks are actually trading lower now across the year. With COVID cases also rising in Europe the travel sector could struggle to find buyers.

Energy and commodity stocks are also on the decline as metals and oil fall lower, Gold miners are bucking the trend, tracing the safe haven higher.

The tech heavy Nasdaq has seen a smaller selloff than its peers as the COVID trades favours those stay at home and WFH tech stocks. Could tech return as the Darlings of Wall Street?

Oil

Oil prices have tumbled, down over 6% as the demand outlook is starting to cloud on the new strain discovery. Concerns over rising covid cases in Europe have also been weighing on oil recently. Supply side fears are adding to the negative tone surrounding oil, amid fears of a supply glut as the US and other oil consuming countries prepare to release emergency reserves.

Gold

The precious metal surged to an all-time high of $2075 mid-pandemic last year and is on the rise again. Not only is Gold supported by safe haven inflows but also by declining probabilities of the Fed hiking rates should this variant start spreading quickly.

Forex

Safe haven currencies such as the Swiss Franc and the Japanese Yen have performed well on the announcement and are the ones to keep an eye on in case of more covid bad news. Interestingly the USD, which is often considered a safe haven is falling as investors reassess the chances of a rate hike by the Fed.

Central banks are likely to be more cautious about hiking rates if covid restrictions could be re-imposed.

Conclusion

The market has seen a big move on the new strain announcement as it served as a reminder that covid flare ups could still knock recovery progress.

covid statistics could be back in the driving seat for the markets. However, it is still early days. This isn’t the first time that covid strain news has prompted a reaction in the market and it remains to be seen to what extent it could threaten the bull run.

How to trade with City Index

Follow these easy steps to start trading with City Index today:

Open a City Index account, or log-in if you’re already a customer.
Search for the market you want to trade in our award-winning platform.
Choose your position and size, and your stop and limit levels
Place the trade.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.