Markets have been treading cautiously over the past couple of weeks. Yesterday’s news concerning the new South African variant has really tested investors nerves this morning with markets moving markedly lower today. At the open the UK market (FTSE 100) was down almost -3.5% before recovering slightly. Having been closed for Thanksgiving, US markets are also due to open lower this afternoon, although it looks like European markets have borne the brunt of the volatility.
New South African Variant
At this point, the concern isn’t whether the strain is more potent or deadly, rather the high number of mutations in its spike protein. Those spikes play a significant role in how the virus is transmitted and are also the main feature targeted by vaccines when combating infections. The UK government has already banned flights into the UK from 6 countries in Southern Africa. Whilst we have come to expect such news and the subsequent knock-on effects, investment markets are by no way immune to short term volatility with any bad news tending to snowball.
By way of an example, oil prices fell by more than 5% this morning. With fears of restricted travel and slowing economic growth, the immediate assumption is there will be weaker demand for oil. To compound this, the sell off for oil hasn’t come at the best of times. The US has just announced its plans to release millions of barrels of oil from strategic reserves in coordination with other large consuming nations as part of the plan to cool oil prices. The Economic Commission Board expects a surplus of 3.7 million barrels per day by February next year. So, with supply expected to dramatically increase, and fears of demand potentially weakening, news of a new COVID strain has had a larger impact than it ordinarily would on the oil price.
To put today’s price movements into context, the chart above shows the oil price recovery over the past 12 months. Relatively speaking, the selloff is very minor when considering where the oil price was at back in January. However, a falling oil price tends to serve as a drag on equity markets, hence the term ‘snowball’ referenced earlier. Therefore, the oil price reaction has compounded the wider equity market retreat.
Should we be worried?
In recent weeks, markets have been grappling with various potential headwinds including a new wave of infections in Europe, inflationary pressures and supply chain issues to name a few. Despite this, they have still been pushing record levels. This latest bit of news serves as an excuse for investors to take some risk off the table and indeed, take a bit of the froth out of the market. Therefore, short-term setbacks are still to be expected moving forward as investors continue to weigh up the global recovery prospects with short term noise and disruption.