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EUROPEAN MIDDAY BRIEFING - Stocks, Oil Drop on Concerns Over New Covid-19 Variant

11/26/2021 | 06:31am EST

MARKET WRAPS

Stocks:

European stocks fell after South Africa raised the alarm over a new, fast-spreading strain of the coronavirus, triggering concern about the potential for new travel restrictions or other curbs that could limit economic activity.

South Africa's government said Thursday it was considering new public-health restrictions to contain the new variant, dubbed B. 1.1.529. Scientists say it has a high number of mutations that may make it more transmissible and allow it to evade some of the immune responses triggered by previous infection or vaccination.

The variant has been detected in a South African traveler in Hong Kong. The South African rand weakened sharply against the dollar, with $1 buying about 16.3 rand.

"Everybody seems to be panicking about this new variant that is cropping up out of South Africa," said Rob Carnell, the head of research and chief economist for the Asia-Pacific region at ING.

It wasn't yet clear if the new strain would prove to be more infectious or deadly than the Delta variant, but investors were concerned about potential travel restrictions, Mr. Carnell said, adding that in a scenario where current vaccines were ineffective, broader lockdowns might be needed.

"There probably aren't that many people active in markets at the moment. That's likely to be causing bigger movements than you might otherwise have expected," he added.

Travel stocks were some of the biggest losers. Japan Airlines, rival ANA Holdings and Australia's Qantas Airways fell between 4.5% and 6.5%. The Japanese yen, which typically strengthens in times of rising market stress, gained against the dollar.

"For now, Covid is back on the table," said Takeo Kamai, head of execution services at CLSA in Tokyo. Although Japan has no confirmed cases linked to the new variant, investors were concerned it could push back the government's plans for a gradual reopening of the economy, Mr. Kamai said. Tokyo recently said it would allow in short-term business travelers.

Technology stocks also wilted after Bloomberg reported that China had asked Didi Global to devise a plan to delist in the U.S. The Wall Street Journal has previously reported the ride-hailing giant was considering going private, partly to placate Chinese authorities, and that regulators in China have suggested it list in Hong Kong.

Data in focus: While new infections in the eurozone have risen to record levels, vaccinations have driven a wedge between infections, hospitalizations and deaths, and this recent rise in cases isn't expected to derail the recovery, Citi said.

This is because the link between the intensity of the pandemic and peoples' mobility has lessened, and so has the connection between mobility and GDP, economists at Citi said.

Vaccinations are likely to be part of the solution, but lockdowns and luck might also be required, Citi said. Depending on whether vaccinated people are included in lockdowns, Citi estimates that the weekly hit to GDP would range between 0.2% and 0.5% of quarterly GDP, down from 1% in previous lockdowns.

U.S. Markets:

Stock futures slumped as global markets plunged, after scientists detected a new COVID variant in South Africa that could be the blame for a recent dramatic spike in cases.

Investors are returning from the Thanksgiving Day break to a shortened session for U.S. markets, which is often accompanied by thinner volumes as traders often wait until Monday to return.

There is no economic data on the calendar for Friday. But the week had been simmering with concerns about rising COVID cases in Europe and new restrictions.

Fear of a new variant was overshadowing the Black Friday shopping day, which puts the focus on retailers as consumers shop for bargains.

Forex:

The recent appreciation of the U.S. dollar has gone too far, said DZ Bank. The euro, which has fallen sharply against the dollar recently, should recover over the coming six months, it said, and maintains a one-year EUR/USD forecast at 1.18.

Inflation rates of 2021 will be a "thing of the past" by mid-2022, so the U.S. Federal Reserve is unlikely to take the aggressive approach that markets are currently expecting.

Meanwhile, the European Central Bank will be in the midst of its own tapering program, said DZ Bank analyst Sonja Marten. Robust growth rates in the eurozone should give reason for the euro to gain ground, she said.

It is hard to see the Turkish lira stabilizing at a time when markets are anticipating that the Fed could start raising interest rates next year and are repricing global rate expectations, said Magdalena Polan, lead economist for emerging market economies in Central Europe and the Middle East at PGIM Fixed Income.

"It is even more challenging than in 2020, at a time of comparatively easy money," she said, adding that now the country's authorities are going against the Fed and against a slightly weaker Chinese growth picture.

The economist said it's hard to see how Turkish policymakers will come out of this given an unwillingness to engage in more orthodox policies, but they will have to take measures eventually.

Bonds:

NN Investment Partners said it has opened a moderate overweight in German Bunds, while it maintains its underweight in U.S. Treasurys.

The change reflects its view that the likelihood of the Fed's living up to the market's expectations has increased, and that the expectations for the ECB look even more stretched than before, Maarten-Jan Bakkum, senior emerging-market strategist at NN IP, said.

"Given the headlines about potential lockdowns in Europe and the subsequent drop in European rates, we considered it prudent to adopt a less overall directional view on global rates in the short term," he said.

German 10-year Bund yields could reach 0% next year, but that level should generate demand, quickly turning yields lower, said Metzler. The 10-year U.S. Treasury yields could reach and also rise slightly above 2%, it added.

"One thing remains clear for government bonds on both sides of the Atlantic: fear of a drying up of vital liquidity is not reasonable," Metzler said.

For the already very hesitant central banks, the still tense pandemic situation should provide sufficient arguments to move only marginally or, in case of doubt, not at all, Metzler said. Currently, worries over surging Covid-19 cases fuel demand for government bonds.

Commodities:

Oil prices remained firmly in the red following South Africa's warning of a new, highly transmissible strain of the coronavirus. Of course, one factor to consider is reduced trading volumes following the U.S. public holiday Thursday and ahead of the weekend. Lower volumes can often amplify the moves of the trades that do take place, meaning asset prices can be more volatile.

DNB Markets's Helge Andre Martinsen said that while the U.K. and Singapore have already halted travel from southern African countries, the EU will soon decide whether to do so.

Copper prices slumped amid fears that a new variant of the coronavirus could hit economic growth and undercut demand for raw materials.The metal, which is used in everything from construction to consumer electronics, is considered a barometer of global growth.

"The one thing we can be sure of is volatility as we approach [the] month end with more and more unanswered questions," said Malcolm Freeman, CEO of Kingdom Futures.

"Probably the most important one being are we heading for a second global lockdown and if that is the case the global markets are bound to be thrown into turmoil once again," he says.

Gold prices rose as concerns about a new wave of Covid-19 hit risk assets and send investors into havens. South Africa's warning that it has detected a new, heavily-mutated variant of coronavirus has prompted concerns over new lockdowns and mobility restrictions, which could hit countries' economic growth again.

"While stock markets are weakening, Bunds and gold are posting significant gains," Alexander Zumpfe, precious metals trader at Heraeus, said. "Uncertainty about the possible consequences of the new virus variant clearly reminds the markets that this pandemic is not over yet."

EMEA HEADLINES

Southern Africa's New Covid-19 Variant Prompts Wave of Travel Restrictions

JOHANNESBURG-Dozens of countries restricted travel to and from South Africa and neighboring nations Friday, hoping to contain a fast-spreading new variant of the coronavirus that scientists say may be more contagious and could render the current crop of Covid-19 vaccines less effective.

Experts from the World Health Organization were due to meet later Friday to decide whether to declare the new strain-currently known as B.1.1.529-a "variant of concern." The WHO uses this label for virus strains that have been proven to be more contagious, lead to more serious illness or decrease the effectiveness of public-health measures, tests, treatments or vaccines.

Private Equity Buyout Boom Hits Bondholders

Leveraged buyouts of companies by private equity firms are sweeping Europe, leaving corporate-bond investors exposed to losses.

Just this week, U.K. retailer Marks & Spencer and Italy's Telecom Italia fell prey to U.S. private equity funds, causing prices of their bonds to drop sharply.

Blue Prism Agrees to Increased GBP1.22 Bln Takeover by Vista Funds

Blue Prism Group PLC said late Thursday that it has agreed to and recommended an increased 1.22 billion-pound ($1.63 billion) final offer from Bali Bidco Ltd., a company indirectly owned by the Vista Funds.

Under the deal, shareholders of the U.K. automation-software company will get 1,250 pence in cash for each share owned, up from 1,125 pence when the company first agreed to a takeover by Vista on Sept. 28. The offer price is a 50% premium to Blue Prism's closing share price of 832 pence on Aug. 27, the day before it started the offer period.

Novacyt Shares Rise on Improved FY Revenue Guidance After Covid-19 Test Approval

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11-26-21 0630ET

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