Global stocks are still plumbing the lows after renewed virus concerns spooked markets overnight. Small caps suffered a second consecutive day of underperformance on Tuesday, with traditional defensive, Utilities and REITs closing 1% higher. Most reopening baskets closed 3% lower each, as travel advisory and disappointing United Airlines (NASDAQ:UAL) earnings weighed on equities.
In more positive news, Johnson & Johnson (NYSE:JNJ) said it would restart vaccine deliveries in the EU after the European Medicines Agency said the benefits of the shot outweigh the risks of a possible link with cases in blood clots. On the earnings front, Netflix (NASDAQ:NFLX) missed expectations, weighing heavily on the stock, down as much as 11% in after-hours. The US dollar rose for the first time in 7 sessions, and the 10-year US Treasury yield dropped to its lowest level in over five weeks and proved to be a good combination for gold.
A worsening health crisis in India pushes out the return of pre-COVID travel even further in the APAC region. It highlights the uneven pace of economic recovery in pockets of EM. Sticky travel restrictions leave economies with greater dependence on tourism (e.g. Thailand) and domestic demand (e.g. India) at risk of further disappointing growth expectations in 2021. Which is severely clouding the oil markets viewfinder and pushing back on jet fuel recovery
There is little let-up in COVID-variant concerns in EM, with India now in sharp focus. The long positioning in Indian equities is stretched judging by record inflows over the past year, suggesting that it is too early to fade the rally in USDINR. More broadly, variants are delaying the recovery in pockets of EM and driving the outperformance of DM equities over EM, +9.0pp since Feb. 17. Meanwhile, the export-driven North Asian economies have more to gain on a relative basis and are all chalking up solid recoveries in shipments.
The more export-driven North Asian economies have more to gain on a relative basis, which China and Korea chalking solid recoveries in exports The COVID resurgence has delivered an untimely conk buster.
MARKETS
US stocks fell for a second day as broad-based risk-off narrative envelope’s global capital markets amid rising virus cases worldwide that threaten to derail the recovery train. Companies whose destinies are closely connected to the reopening of the worldwide economy are hardest hit.
Investors continue to worry about the worsening COVID-19 situation, particularly in India and Japan, which have triggered a two day pull back with continued anticipation of more state emergency requests.
Delivering and untimely conk buster, the surge has led to increased travel restrictions and severely dented parts of the priced to perfection reopen trade, leading to renewed concern over the continued economic impact, shrouding a batch of solid corporate results in the cloud for COVID uncertainty. Indeed "priced to perfection" and rising COVID worry make for the worst possible bedfellows.
The glaring problem is that despite strenuous efforts by the medical community around the globe, we are not even close to calling it a day so that people can start again or continue with things more productively.
Vulnerability to renewed infections will translate into weak domestic demand in Asia. But fortunately, exports continue to strengthen, which is pillowing the slide.
OIL MARKETS
Oil plummeted overnight amid worrying COVID resurgence as the epicenters of crises fall on two of Asia largest importers of crude oil, India, and Japan, which make up over 16 % of global oil demand.
Increased travel restriction has derailed Eid holiday plans threatening the nascent jet fuel recovery, while new waves crashing onshore in Japan will likely lead to more state emergency requests.
With new COVID waves bringing risks onshore unless there is a quick reversal of tide, it would likely require a rerating lower of global oil demand forecasts for this year. This latest COVID surge has wrong-footed more than few traders who were building long positions ahead of what is expected to be a successful US summer driving season.
Compounding matters is the more optimistic tone from Iran nuclear talks. A lifting of US sanctions and an accelerated return to total production for Iran would mean some near to medium-term pressure on prices.
Safe haven demand for the US dollar, which is the ultimate negative signpost for risk, has also weighed on sentiment.
FOREX
The USD is stronger this morning, capitalizing on "risk-off" which is enveloping global markets. But for the US dollar to make any significant headwinds, it is mainly reliant on a hawkish shift in tone at the Fed to validate a bullish US dollar view.
Ringgit
With COVID concerns negatively denting oil prices overnight and regional travel restriction likely to remain in force longer than expected due to the new COVID wave hitting Asia's shores Tuesday, yesterday's ringgit recovery could get walked back amid "safe-haven" demand for the US dollar.
GOLD MARKETS
Gold has held up well in the face of a slightly stronger safe haven US dollar but supported by falling US yields as the global capital markets veer to a decidedly defensive stance. The fact that gold has somewhat managed to move higher despite the safe haven demand for the US dollar is also reassuring, as it could be a sign that any reallocation that could have been taking place might be taking a long hiatus, especially with stocks under pressure and more extended stimulus support to the economy possibly needed as this recent COVID surge could ultimately delay Fed taper.