Published: August 20th, 2021
The big stock indices fell, and oil slid through four straight days of declines as traders got to grips with mixed economic numbers and pondered the likely economic impact of the fast-spreading delta-variant COVID-19.
Wall Street headed sharply southward, with significant declines seen in big-cap tech and consumer goods stocks as investors signalled their reduced risk appetite.
The S&P 500 lost 0.69 per cent after posting record highs at the start of the week. The Dow Jones Industrial Average fell 0.78 per cent, abruptly ending a five-day streak of steady gains, while the Nasdaq Composite came down by 0.92 per cent.
More broadly, the MSCI world equity index, which tracks shares in 45 countries, dropped by 0.75 per cent.
The threat of reduced demand for international travel and new pandemic lockdowns in countries like Australia and New Zealand dragged crude oil prices down, complicated by a consensus within OPEC and its allies that market supply needs to be kept at current levels.
Brent crude ended the week down 47 cents at USD 69.02 per barrel, while West Texas Intermediate dropped 1 per cent lower before settling at USD 66.58 per barrel.
At mid-week, markets started sounding a pessimistic note when the US Commerce Department reported a slide in American retail sales of 1.2 per cent in July, well under consensus expectations. The picture became even cloudier when separate data suggested US factory output surged in the same period.
Those statistics cast new doubt on America’s ability to get a handle on the evolving pandemic and get its economy back on track.
Kurt Lang, chief economist at Bank of America, told Bloomberg that rising COVID cases are ‘starting to impact consumer confidence. He noted, however, that restaurant spending also rose in July, suggesting that consumers haven’t given up yet on the recovery.
Federal Reserve Chairman Jerome Powell said in a press conference on Wednesday that it remained unclear if the delta variant’s spread will make a serious dent in economic growth, saying that many businesses have proven able to adapt.
Beyond continuing coronavirus worries, gripping scenes from the hasty American pull-out from Afghanistan stoked safe-haven demand, driving the greenback dollar to three straight days of gains. Treasury yields, meanwhile, remained largely unchanged despite choppy trading through Wednesday and Thursday as investors sifted through the murky economic data.
The fed will give investors more to consider next week when it releases the minutes from its July policy-setting meeting. Forex traders will be on the lookout for signals about the timing of the long-anticipated walk back from the fed’s massive stimulus programme.
Safe-haven currencies like the yen gained against riskier peers. The euro dropped to 128.49 yen at one stage on Wednesday, its lowest level since late April. The Swiss franc also held onto an eight-month high of 1.0719 against the euro.
Economists at Daiwa Securities said in a note to investors that the moves ‘appear to reflect a deterioration in investor sentiment. It’s our belief that the COVID-19 delta variant is to blame.’
Investors are still sifting through Tuesday’s China numbers which showed industrial production and retail sales dropping far more than expected last month; something also blamed on delta's relentless spread across APAC.
Meanwhile, fed Chairman Powell spoke at a town hall for educators on Thursday. However, he didn’t address monetary policy, saying market watchers needed to wait until the central bank’s Jackson Hole gathering, set to take place next week in Wyoming.
Analysts at Bank of America in New York said events in Afghanistan, where the Taliban over-ran the country in a matter of days following the US departure, also curbed risk appetite. However, the direct impact on markets has been limited so far.
Elsewhere, NZD/USD fell by 1.3 per cent to 0.6926 after Auckland announced a new nationwide lockdown after posting its first case of Covid-19 in over six months. The news might stop the Reserve Bank of New Zealand from tightening policy at its meeting next Tuesday.
Markets are anticipating that the central bank will approve the first rise to the country’s benchmark interest rate since 2015.
Across the Tasman Sea in Australia, AUD/USD fell by 0.7 per cent after minutes from the Australian central bank's last policy meeting we made public.
The Reserve Bank of Australia shocked markets by sticking with plans to begin tapering bond purchases; however, the bank’s policy committee did say the RBA is prepared to take further action if COVID-inspired lockdowns trigger a deeper economic malaise.
The slide continued at the week's end, with AUD/USD plunging by 2.7 per cent for the week, with the greenback hammering its major currencies counterpart. Unless the Aussie makes a u-shaped rebound next week, August will see one of AUD’s worst performances this year. If the Australian dollar stays out of favour into next week, analysts believe it could lose another full percentage point.
The delta outbreak is intensifying Down Under, despite new lockdowns coming into force. The state of Victoria set a new daily record of 691 cases. With no vaccine yet approved for young children, virologists are concerned the delta variant could continue to spread as children return to school. Adding to coronavirus worries is a more generalised risk aversion across global markets. Taken together, it creates a recipe for broad USD gains against a host of currency majors.
On the upside, Australian employment figures were notably better than expected. Yet, it wasn’t quite enough to slow the Aussie’s downward spiral. The country added 2,200 new jobs in July, compared to a forecast loss of 43 thousand. The unemployment rate also dropped sharply to 4.5 per cent, less than the five per cent economists expected. The rises were more impressive against a backdrop of lockdowns across the country.