Why the latest Covid variant is spooking markets

TL;DR

• A new Covid-19 variant caused stocks, cryptocurrencies and commodities to fall sharply, as countries started imposing travel restrictions again.
• The ‘Nu’ variant has caused significant concerns as it has higher transmissibility and immune escape, and has taken over the Delta variant as the dominant strain in Guateng, South Africa.
• In previous episodes where new variant were discovered, the stock market shrugged concerns off within weeks as existing vaccines were found to be effective in lowering hospitalisations.
• As the uncertainty drives more volatility in the market, a key support level to watch out for is whether the S&P 500 can stay above 4,550.

What happened?

Covid variant “most worrying we’ve seen”. Risk assets from stocks to oil and cryptocurrencies fell sharply on Black Friday due to concerns brought about by a new Covid-19 variant. Dr Susuan Hopkins, the chief medical advisor to the UK Health and Security Agency, has warned that the B.1.1.529 or ‘Nu’ variant is the “most worrying we’ve seen” due to the high transmission rate in South Africa. Many countries including Singapore have announced travel restrictions on several African countries to limit the spread of the variant.

What does this mean?

While there is still a lot there is not known about the variant, it has caused significant concerns as:

• It has more mutations than other variants, and has mutations seen in other variants associations with higher transmissibility and immune escape
• The effective reproduction number, or R value, of the variant ins Guateng in South Africa was now 2. An R value above 1 would mean that the virus will spread exponentially.
• Virus sequencing in Guateng shows that it is rapidly taking over the Delta variant as the dominant strain of virus.

What would Beansprout do?  

• We’ve seen this before.  While past performance may not always be a guide to future performance, it might be worthwhile looking back at previous episodes of Covid variant concerns. Recall the Mu variant in October 2021? While it made headlines due to a specific mutation which could evade vaccine immunity, its prevalence fell quickly in a few weeks as the higher transmissibility of the Delta variant caused it to remain to dominant strain. Likewise, the stock market shrugged off concerns driven by the Delta variant in August as existing vaccines were found to be effective in lowering hospitalisations from the virus.
• Key S&P support level at 4,550. As we await further details about the variant, the increase in uncertainty is likely to drive more volatility in the market. In terms of technicals, a key level to watch would be whether the S&P index is able to find support around the 4,550 level, which was its high in early September. The Black Friday sale is on, and it might be time to start preparing your shopping lists.