New Covid Strain Unsettles Markets:

Last week we saw Covid come roaring back as a concern for financial markets. The effectiveness of vaccines had pushed Covid down the list of investor concerns. It has been replaced by inflation and supply chain disruption. However, the recent rise of cases in Europe has already reminded markets that the pandemic is not yet under control. The emergence of a new, potentially more infectious, Covid strain has jolted markets out of their complacency. Furthermore, it has resulted in a broad sell-off in risk markets. There is relatively little information available and many markets are at or close to all-time highs. So, the initial selling looks a lot like precautionary profit-taking. Government bonds have risen in value as investors seek a safe haven.

Meanwhile, politics in the UK has sunk to discussing Peppa Pig World! But, other countries appear to be getting on with the business of governing. Germany is set for a new Chancellor after Olaf Scholz managed to agree a new coalition government. Meanwhile, in the US, President Joe Biden opted for continuity. He did this by proposing Jerome Powell for a second term as chair of the US Federal Reserve.

Markets Rattled By New Covid Strain

Global stocks and oil prices fell sharply on Friday. It came as investors rushed to safe haven assets following the emergence of a new coronavirus variant in South Africa. The UK and EU moved to impose restrictions on travel to South Africa.  The country has seen a surge in cases of the new B.1.1.529 variant, which has alarmed global health officials. The new variant appears to be more infectious than previous variants. So cases are rising faster than when the Delta variant emerged.

Equity markets fell significantly following the news. Europe’s Stoxx 600 fell 3.1% in early trading and the UK’s FTSE 100 index fell 3.2%. Travel stocks were most affected as IAG dropped around 20%. Oil stocks also fell and BP shares dropped 6% as the price of crude oil tumbled to $73.25 per barrel. The flight to safety has driven up government bond prices. It has pushed the yield on the UK 10-year gilt down to 0.83%.

Lira Falls To New Low As Central Bank Cuts Rates Again

The Turkish lira suffered a major fall after President Erdogan pushed the central bank to cut interest rates again. The move, he said, was an attempt to fight an “economic war of independence.” [see article]. The currency, which is down more than 40% against the dollar this year, fell a further 15% on Tuesday. It has now reached a historic threshold of 13 to the dollar after Erdogan used a contentious speech to talk about his vision for the country’s economy.

Last week’s interest rate cut comes as the country faces inflation of almost 20%. In contrast to most economic theory, Erdogan holds the view that high interest rates cause high inflation. His pressure on the central bank to cut rates has led to the sacking of two governors of the Turkish Central Bank in 18 months. The dramatic fall in value of the lira has hit overseas investors in the Turkish stock market. In lira terms the MSCI Turkey index is up 129% over five years. However, sterling investors would be facing a loss of 39%.

 

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