Investors have spent the past year learning to relax about the pandemic, lulled by abundant stimulus and expectations that vaccines would keep the virus in check. That sense of calm was shattered on Friday.
Global stock markets tumbled by the most in a year, shaken by the discovery of a new coronavirus variant in South Africa, which was found to be spreading. Many investors had, until this point, shrugged off rising infection numbers in various countries and the reimposition of travel bans and lockdowns, but Friday’s news rattled that confidence.
The market reaction was swift and severe because the market wasn’t pricing this in. In the list of investor worries, COVID had fallen relatively far down. There is a feeling that they don’t have enough information about this yet, so the market will invest a meaningful amount of money until after the weekend when we know more.
Bond markets, which have recently fixated on the potential for early interest rate rises as central banks battle stubbornly high inflation, made a sharp change in course. Global government debt rallied strongly as investors sought a safe harbor and dialed back some of their expectations for monetary tightening next year. The United States 10-Year yield fell by 0.16 percentage points to 1.49%, its lowest in more than two weeks. Yields in Europe also dropped sharply.
Despite the potential threat of a coronavirus variant that may be able to evade vaccines, it was far too early to fundamentally reassess their outlook for the coming year. Rather, people argued that many of Friday’s moves marked a reversal for popular trades, as fund managers were forced to cut risks from their portfolios amid the sudden burst of volatility.
The knee-jerk reaction is too obvious because if vaccine companies say that their jab works on the new variant, we will get whipsawed all over again, and that’s old school already. For now, investors are nervously awaiting further data on the new variant, an unwelcome throwback to the early stages of the pandemic when fund managers spent hours poring over infection rates.
Federal-funds futures, a proxy for market expectations of interest-rate changes, shifted downward Friday, with the market anticipating that the Federal Reserve will keep interest rates low for longer. CME Group data showed most investors are now pricing in a two- or three-quarter percentage-point rate increase by the end of 2022, compared to three or four on Wednesday. However, it is too early to jump to conclusions as inflation is still dominating the whole story.