Equity markets retreat amid Delta variant concerns | Calamatta Cuschieri

Global shares traded lower last week as the optimism surrounding earnings season was tempered by fears of a rapid delta variant spread - a threat which seems to have been regenerated.

As this highly transmissible variant struck countries that had previously managed to control the virus, shares fell sharply across the continent, on concerns that the predicted economic rebound following the pandemic shock, may have peaked, and thus global economic growth might succumb to the increase in cases. 

Asia has been the main battleground for the latest surge of COVID-19 cases, with many countries in the region struggling to curb the highly contagious delta variant. Citing the latest pandemic-related developments, Singapore reported cases at an 11-month high during the weekend, while Thailand reported 11,784 new infections, the highest single-day increase since the pandemic began.

New York recorded more than 1,000 cases on Saturday in a single day for the first time since mid-May, while authorities in countries including Australia and Vietnam are battling rising infections too. In Australia for instance, Sydney has paused work at construction sites as it tries to bring the current outbreak under control.

Expectedly, the ripple effects of the increase in cases is at present being felt across financial markets. In early morning trading on Monday, the Nikkei ( -1.46%), Hang Seng (-1.59% ), Shanghai Comp (-0.31%) and Kospi (-0.92%) were all trading lower, implying that market sentiment is continuing to be predominantly driven by concerns surrounding the spread of the delta variant.

Wall Street also ended lower on Friday, weighed down by declines in Amazon, Apple and other heavyweight technology stocks, as investors demonstrated additional signs of concerns vis-à-vis the rise in coronavirus despite better than expected retail sales.

The S&P 500 fell by -0.97% last week (-0.75% Friday) in a broad based sell-off that saw cyclicals sectors, such as banks (-2.56%) and growth sectors like semi-conductors (-4.06%), fall back sharply.

Technology oriented stocks experienced larger losses as the NASDAQ declined by -1.87% last week (-0.80% Friday), however the largest decline was experienced in small-cap stocks with the Russell 2000 decreasing -5.12% (-1.24% Friday), this being the third consecutive weekly loss for the index and worst weekly performance since October.

After an uneasy end of week, futures markets signalled that the S&P 500 index would further drop in early trades this week. Indeed, yesterday emerged as one of the worst days over the past months, as risky assets globally tumbled to late June lows with the delta variant weighing on investors sentiment. Indeed, a slump in the 10-year was noted, while European peers headed into the same direction, as investors flocked to safer assets.

Moving to Europe, a number of European countries, including France, the Netherlands, Greece and Spain, announced new restrictions last week in a bid to curb a rise in infections. These restrictions impacted market participants’ sentiment. Indeed,  European equities traded similar to their peers, as the STOXX 600 ended the week -0.64% lower, while geographically positioned indices such as the FTSE 100 (-1.60%), CAC (-1.06%) and FTSE MIB (-1.03%) all underperforming.

Notwithstanding the 40% jump in coronavirus infections witnessed in England earlier this month, the country has moved forward with relaxation of the pandemic related restrictions. More specifically, England lifted its restrictions from Monday, including social distancing rules and limits on social gathering, even as the number of its recorded coronavirus cases topped 50,000 a day.

Ironically, despite the speedy vaccinations program, the Delta variant has reignited fears that forceful restrictive measures might be implemented going forward. This in turn would once again push the global economy on the brink of another recession, at a time when huge amounts of debt was piled in order to combat the pandemic. This time round the support by both fiscal and monetary politicians might be conditioned by the lack of ability to once again support the global economy. 

Concerns about the virus are particularly problematic for sectors such as travel that were expected to benefit the most from the reopening of the global economy. Thus the travel value trade might once again be postponed given the resurgence in cases and the more stringent travel restrictions taken by selective economies. This is indeed being priced in sector as the Stoxx travel index dropped 2.6% last week.

Clearly, the overwhelming fire power from governments and central banks was enough to instigate not only confidence but also hope that the worst is over following the vaccine discovery. Nonetheless, now it seems that the transmission virus element has complicated matters going forward and the said support might emerge as insufficient to annihilate it. Inevitably, in view of the daily pandemic-related developments, the outlook for the global equity market remains uncertain.

Nevertheless, long-term investors should consider building up positions in companies with strong balance sheets, and capitalise from opportunities which are triggered by volatility. In reality, a good company supported by a strong business model and solid fundamentals will always reign over the longer term. Thus, despite at times volatility might cause uneasiness, it might also be appropriate in taking the right opportunities to achieve the desired outcomes. Going forward the road might be bumpy, but keeping an open eye and diligently select the best opportunities is imperative.

This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.