Asian stock markets were under heavy selling pressure with investors spooked by the emergence of a heavily mutated variant of Covid-19 in South Africa, lovingly called B.1.1.529.

The UK has paused flights from South Africa and five other neighbouring countries, and we can expect more of the same elsewhere, the complacency seen with the emergence of delta in India being a lesson harshly learned. Two cases with the new variant have already been detected in Hong Kong today. Headlines are also floating around about tightening virus restrictions in parts of China.

With US markets closed for holidays, investors are voting with their feet. The one bull in the China shop that could truly derail the global recovery has always been a new strain of Covid-19 that swept the world and caused the reimposition of mass social retractions.

All we know so far is the B.1.1.529 is heavily mutated but markets are taking no chances, equities are falling, haven currencies such as the US Dollar, Japanese yen and Swiss franc are rallying, commodity currencies such as the CAD, AUD and NZD are being sold, US 10-year bond yields have moved sharply lower, and oil has slumped. USD/ZAR and USD/MXN are 1.0% higher signalling Asian FX will be under pressure. In other words, a classic risk-off, flight to safety move.

With the Delta wave in mind from earlier this year, investors are likely to shoot first and ask questions later until more is known about it. Unlike many, I do not pretend to be a learned armchair virologist, but viruses do not mutate to become less effective, so assuming the worst is probably the safe option for now. The return of US markets today, mostly for a half-day session, is unlikely to change that narrative ahead of the weekend.

We could talk about the Asian data calendar today, but it really doesn’t matter anymore, only one theme will be driving markets today. Australian Retail Sales did post an extraordinary 4.90% MoM rise for October, thanks to the reopening of New South Wales and Victoria. We could also speculate on Black Friday/Cyber Monday or next weeks start-of-month calendar, culminating with the US Nonfarm Payrolls. In reality, investors around the world will be glued to their news feeds as the WHO meets with South African officials today, and the evolution of the B.1.1.529 variant. That will drive price action at the start of next week.

For today, I expect haven currencies to outperform with emerging market FX and commodity/risk sentiment currencies likely to have a tough day at the office. Gold will remain well supported even as oil and industrial metals suffer. US bonds are always a favourite place for investors to run and hide, and yields should continue to fall today. (prices move inversely to yields). That alone should mean the dollar remains a favourite.

The equity space will remain unloved, and I would imagine Europe, which already has Covid-19 issues weighing on asset prices, will come in for particular attention with German Bunds being the main beneficiary. If one was to look for good news in the stock space, one could consider technology and dusting of that working from home portfolio again. At least Zoom will be happy.

Haven currencies boosted by virus fears

With Covid-19 variant fears washing across financial markets today, haven currencies have outperformed at the expense of emerging and commodity/risk sentiment currencies. Trading was muted overnight due to a US holiday with the dollar index easing slightly, driven mostly by gains in the yen.

EUR/USD and GBP/USD are holding steady. Their technical picture remains bearish and neither of them is likely to receive any haven inflows. With Europe already capped by its fourth virus wave situation, both will remain sells on any sort of rally.

Elsewhere, USD/JPY has fallen as Japanese investors repatriate into yen in a defensive move. USD/JPY could fall to 114.00 in the next 24 hours. Likewise, the Swiss Franc is outperforming. The Canadian, Australian and New Zealand Dollars, bellwethers of commodity and risk sentiment, have unsurprisingly, suffered. USD/CAD is up, AUD/USD has fallen and NZD/USD is lower. Both AUD and NZD are approaching their 2020 lows and a weekly close below 0.7100 or 0.6800 respectively, would be another bearish technical signal.

USD/ZAR and USD/MXN have risen band Asian regional currencies are under some selling pressure as well. USD/IDR and USD/THB have risen with USD/KRW and USD/MYR rising by 0.30%. With a high beta to the global recovery, Asian FX will remain under pressure into the weekend thanks to the virus nerves sweeping markets, as with EM in general. USD/CNY is stubbornly clinging to 6.3900, providing some shield to regional currencies. China is unlikely to use today’s developments to weaken the Yuan sharply, but it is another reason to reel back the one-way bullish bets on the Yuan of the past few months.

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