Global markets shaken by fears over Delta variant

The threat of the Delta coronavirus variant hit global equity markets on Monday, handing European bourses their worst session of the year and sending US stocks down 1.6 per cent.

Commodity prices also fell and investors headed for the safe haven of government bonds. It helped to push the yield on the 10-year Treasury note to its lowest level in six months, extending a shift in investor sentiment as fears over runaway inflation have given way to creeping concerns over the durability of US growth, compounded by the spread of the Delta variant.

Europe’s region-wide Stoxx Europe 600 lost 2.3 per cent in its biggest one day price fall of 2021, with London’s FTSE 100 dropping by the same amount.

On the other side of the Atlantic, the S&P 500 index lost more than 2 per cent before moderating in afternoon trading to close 1.6 per cent lower. The technology-focused Nasdaq Composite fell 1.1 per cent. In commodities, Brent crude, the international oil benchmark, declined 7.1 per cent to $68.38 a barrel.

Column chart of Stoxx Europe 600 index, daily % change showing Worst day for European stocks this year

The yield on the US 10-year Treasury note — a benchmark for assets around the world — tumbled 0.10 percentage points to 1.19 per cent, its lowest level since mid-February. Yields on the German 10-year Bund fell to minus 0.39 per cent and on the UK 10-year gilt to 0.56 per cent, both five-month lows.

Government bonds have been rallying for weeks as some of the acute anxiety over inflation this year has started to ebb. But Monday’s moves mark a significant acceleration of the drop in yields and a shift in tone as gains for bonds came alongside an equity sell-off.

“This is the market’s realisation that we are moving from a clear V-shaped recovery into something a lot more uncertain,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privée. “The hope was that vaccines would provide us with the endgame. Now investors are looking at the UK and there’s a bit of fear with regards to reopening so aggressively when cases are still so high.”

The pullback in stocks, which came after months of steady gains in markets around the world, also reflected concerns that economic growth generated by industries reopening from last year’s shutdowns could peak just as inflation surges in Europe and the US.

Line chart of Brent crude in 2021 ($ a barrel)  showing Oil price drops as Delta variant clouds outlook

“Valuations and sentiment all reached extreme growth highs,” said Ewout van Schaick, head of multi-asset investment at NN Investment Partners. “Now, of course, the revival of the virus is causing uncertainty about economic progress in the months ahead.”

New York state on Saturday recorded more than 1,000 cases of Covid-19 in a day for the first time since mid-May, while authorities in countries including Australia and Vietnam battled rising infections. Singapore tightened social distancing restrictions and preparations for Tokyo’s Olympic Games were set back by a coronavirus outbreak.

England lifted most coronavirus restrictions on Monday while more than half a million people, including Prime Minister Boris Johnson, had been told to isolate after coming into contact with infected individuals.

“The growing apprehension surrounding the global rebound . . . has contributed to the bid for Treasuries that we suspect has ample room to extend,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

Sterling dropped 0.7 per cent against the dollar to $1.3665, its lowest level since early February. The dollar index, which charts the progress of the greenback against major currencies, rose 0.2 per cent.

Economists expect the US economy to have grown at an annualised rate of 9 per cent in the second quarter of the year, but to moderate thereafter. Fresh data are due at the end of this month.

US consumer prices rose 5.4 per cent in June, year on year, following pandemic-related supply chain bottlenecks and trillions of dollars in monetary and fiscal stimulus. Inflation also exceeded the Bank of England’s target last month.

The sharp fall in Brent crude tripped up widespread bets on further gains, as economic growth concerns compounded earlier falls caused by Opec and its allies reaching a deal to raise production to counter increasing prices.

Opec+ agreed on Sunday to increase production by 400,000 barrels a day each month well into 2022, though traders said this amount had been widely anticipated by the market.

Saudi Arabia and the United Arab Emirates overcame differences in how production targets are calculated by agreeing that large producers in the group would have the so-called baseline output levels revised higher, though this is unlikely to add any additional oil supplies in the short term.

Some market participants believe Opec+ is being overly optimistic about supply and demand balances, however, with huge uncertainty over how the demand recovery from the pandemic looks.

Analysts at Facts Global Energy said the group had set itself “a very optimistic production path through next year”.

Three-month copper futures, a barometer of likely economic growth, fell 1.4 per cent to $9,311 a tonne.

Additional reporting by David Sheppard in London

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