On Black Friday: Panic

There’s nothing like inserting a negative macro catalyst into holiday-thinned Friday trading to shake things up.

Panic swept across risk assets following the Thanksgiving holiday in the US, as concerns over a new COVID variant prompted the UK, Israel and Singapore to restrict travel from South Africa.

The B.1.1.529 variant boasts more mutations than previous strains and scientists are attempting to discern whether it’s more transmissible. It’s the dominant strain among new infections in South Africa, according to media reports, and it was found in vaccinated people in Botswana. In addition to South Africa and Botswana, the UK’s flight restrictions apply to Eswatini, Lesotho, Namibia and Zimbabwe.

The variant is already in Hong Kong, where a traveler from South Africa and someone quarantining in a hotel room across from his are infected. According to city health officials, the traveler was wearing a mask with a valve that didn’t filter exhaled air. The virus may have drifted out of his open hotel room door and found its way across the hall, apparently. A dozen people staying in nearby rooms were taken to a government quarantine facility for two weeks.

Markets shuddered. Perhaps the most poignant example was an egregious rout in European travel and leisure shares, which tumbled some 7% at one juncture, wiping out gains for the year in the process (figure below).

The gauge is down 17% in November alone.

This comes at an extremely inopportune time for Europe, where some nations are grappling with their worst outbreaks yet. Germany’s new coalition government is in a decidedly unenviable position. A new national lockdown and vaccine mandate would be politically unpopular in some corners, but the situation is dire. Earlier this month, Austria, seen as a pandemic bellwether for Germany, instituted a lockdown and announced compulsory vaccinations from February.

“The last thing we need is a new variant,” German health minister Jens Spahn said Friday. Germany will declare South Africa a virus variant area. Airlines will only transport German residents back to Germany and all returning travelers, including those vaccinated, will be compelled to quarantine for two weeks.

“The key question remains whether the highly immunized countries like France, Italy and Spain will manage to weather this virus wave without ultra-strict measures,” ING’s Francesco Pesole and Chris Turner said. “For now, the approach has mostly been focused on applying tougher restrictions on non-vaccinated individuals and speeding up the rollout of third doses, although discussions about potential restrictions around Christmas are mounting.”

French shares fell the most since October 2020 at one point. The Stoxx 600 dove some 4% at the lows. Asian shares were crushed. Russell 2000 futures tipped an egregious rout for US small-caps in the holiday-shortened cash session stateside.

One analyst called the new variant “terrible news” in comments to Bloomberg. “This time, central banks won’t have enough margin to act,” he said.

Speaking of central banks, rate hike bets were pared aggressively. Traders pushed back bets on Fed liftoff to September and pushed the second Fed hike into 2023. Money markets reflected a similar rethink around ECB hikes and BOE tightening. “No one is talking about hot inflation prints today,” Bloomberg’s Michael Read said, flatly.

Bonds rallied hard. Five-year US yields dropped some 16bps (figure below). This is precisely the kind of news that can get you an aggressive bull steepener in the current environment, especially to the extent positioning was set up for belly-led losses as traders bet on faster rate hikes.

Obviously, the timing of the news made the situation immeasurably worse for markets. “This is particularly damaging because a record high was reached only on Monday, so there would have been extra complacency into the Thanksgiving ‘lull,'” former Lehman trader Mark Cudmore said.

Johannesburg-based Ryan Woods described “a lot of panic selling pretty much across the board.” The rand weakened past 16 per dollar for the first time in a year (figure below).

Wood called the UK flight ban “the final straw.”

Oil, meanwhile, collapsed, falling more than 5%. This opens the door for OPEC to tell Washington, “We told you so.” WTI dropped more than 6%.

Rabobank summed it up in one headline: “A Really Black Friday.”

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10 thoughts on “On Black Friday: Panic

  1. Last year I said I felt like Covid would be with us for the long term and it keeps proving me right. Regardless, the quote “it will go away like it never even happened” seems like it needs to remind those who want to re-elect a guy who’s name rhymes with dump. Instead we are looking at possibly the worst pandemic since smallpox.

  2. Unless the whole world is vaccinated, which is difficult to imagine, then we will be faced with new mutations going forward indefinitely.

    This is not a surprise. This is what viruses do.

    With that said, each new variant won’t necessarily be as deadly as the prior variants. Some immunity has been established now — both from vaccinations, as well as from actual infection.

    If, for some reason, the CDC decides that a new updated vaccine is necessary, let’s hope that this time we don’t see the same tired nonsense about how the vaccine is more dangerous than the virus.

    Vaccination is a team sport. It works much better if everyone contributes.

    Incidentally, the time from development through testing approval, production, and distribution, are all much reduced with a new vaccine, versus the original.

  3. Well I bet we won’t hear all the braying from the peanut gallery (Wall Street) about how behind the curve Powell is – at least for a day. The wisdom of starting the taper but not in a rapid fashion is there for all to see. The Fed could still end up behind the curve- the point is that nobody really knows and taking measured steps, at least for now is the right approach. They can always accelarate things if this turns out to be a false alarm. But this event shows that a lot of things can happen to trip up the market and policy.

  4. Not what one really wanted to see on the wires last night. My quick thoughts:

    New virus variant (“nu”?) is probably more transmissible than Delta, as it has rapidly become dominant in S Africa, but relative severity of disease is unknown. Existing mRNA vaccines likely have diminished but still substantial efficacy. If clinical trials start for new vaccine versions, obvious major -ve and +ve implications. The leading monoclonal antibody cocktails are likely lose efficacy against new variant, two less-used mAb are likely to retain it. The new oral antivirals are likely equally effective vs new variant as vs existing variants, as their mechanism is not immunologic. Countries that secured large orders of those will be advantaged.

    I think reaction to new variant is will differ considerably by country and region. China is likely to close up further, as its homegrown vaccines will prove very lacking and CCP knows it. Asia ex-China’s “re-opening” may be slowed/postponed. Europe was already tightening restrictions, EMs probably can’t afford to. As for US, my guess is that government and consumer response won’t be a drastic as today’s stock moves imply. US has secured orders for near-term delivery of about 13MM courses of oral antivirals, ample supply of vaccine, and likely some dibs on new vaccine versions. Politically, returning to broad “lockdown” will be very difficult if not impossible, especially in mid-term year. And of course, to the extent “nu” sends market running back to mega and stay-home tech names, that is +ve for US makets.

    The window for a December rally seems increasingly narrow. Is Santa going to thread the needle between nu and debt ceiling, or between debt ceiling and year-end? I’m still in de-risking mode.

  5. You definitely used “better words” than I would have, but my immediate take is pretty similar in regards to the threat caused by the new variant (apparently now named Omnicron). However, I think all that leads to a minimal impact on the US economy and Mr Market will remember that bad news is good news (especially in regards to Fed actions) over the weekend and the algos will get adjusted as such. The Santa rally will ensue as soon as Monday through OpEx mid-Dec, rubber band like. Post OpEx, that’s a whole different ball game.

    1. I wouldn’t dismiss the China re-opening slowing/postponing/shutting down further as a nonstarter vis a vis the United States economy. For all the bellyaching about the Fed (of which I have been vocal) the inflation problem definitely will not get better if supply chains are further constrained. While further Fed intervention may be great for markets it’s not going to do anything to help with global supply chain problems and will have little to no impact on an inflation problem that was already being recognized as longer term. Unless the Fed specifies that further aid must be put speicifically towards onshoring manufacturing I expect we’ll see more stock buybacks and bonuses. But I definitely agree that the United States will not shutdown no matter how bad Covid gets again because that would be political suicide. So it’s back to staring at Covid dashboards and hearing about anti-vaxxers dying in droves waiting in line for the emergency room again.

NEWSROOM crewneck & prints