Asian and European shares tumbled to two-month lows on Friday and were set for their worst weekly performance since February as conviction took a beating over the global spread of the new Delta variant of the virus leading to concerns of it halting a worldwide economic recovery. On Monday, Europe’s Stoxx 600 index fell by 1.4 percent and London’s FTSE 100 dropped by 1.3 percent as England lifted most of its coronavirus restrictions.
MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.9% to 667.99, a level not seen since mid-May. The index is down 3.2% for the week so far, the biggest decline since early February. Japan’s Nikkei slid 2%, Chinese shares weakened with the blue-chip CSI300 index of 1.2% and Australian shares dropped 1.6%, with stay-at-home orders in Sydney, the country’s most populous city, tightened further to stop the spread of the Delta variant of the coronavirus. Investors flocked to the safety of bonds overnight with 10-year U.S. Treasury yields reaching levels not seen since February.
Analysts said an accumulation of events has triggered a turn in sentiment rather than a single catalyst. Stocks stumbled as investors grappled with the rapid spread of the highly transmissible Delta variant of Covid-19, which has struck even those countries that previously brought the virus under control. The moves coincided with uncertainty about the path of central banks’ monetary support after inflation rose in the US and the UK. Fears over the highly infectious Delta variant are denting sentiment in markets already on edge after the Fed appeared to take a hawkish tilt this month.
Further ahead, fears over central banks choking economic recovery by tightening various policies in their efforts to rein in inflation, a rapidly spreading Delta variant of the coronavirus worldwide, and still-low rates of vaccination have darkened the outlook.
Another rising concern for investors was the political tensions in the Middle East, Russia, and China while Beijing’s crackdown on foreign-listed Chinese firms took its toll too. As a result, markets are now starting to question one of this year’s most successful trades, the so-called reflation narrative that bets that assets benefiting from a strengthening economy and higher inflation will outperform steadier, safer ones.
The risk-sensitive Australian and New Zealand dollars were under pressure in currencies, down 0.3% each whereas the safe-haven yen hovered near a one-month high at 109.81 per dollar. The dollar index, which measures the greenback against major currencies, gained 0.3 percent and the euro lost 0.2 percent against the dollar to $1.1781.
Gold, another safe-haven asset, was on track for its best weekly performance since end-May which was last up 0.1% at $1,804.84 an ounce. Oil prices were weaker in early Asian trades after hefty overnight gains. Brent crude slipped from 19 cents to $73.94 a barrel. U.S. crude eased 6 cents to $72.86 per barrel.
Even industrialized nations, such as the U.K., are struggling to contain the virus, despite relatively tight restrictions and vaccine progress. So the latest surge in infections across many developing economies, in many cases not yet driven by the new strain, suggests that “outcomes could be far worse now,” Deutsche Bank AG stated in a report.
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