Asian stock markets are under heavy selling pressure this morning 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 this morning about tightening virus restrictions in parts of China.

With US markets closed for holidays, investors are voting with their feet this morning. 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 today. 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 this afternoon, 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 Non-Farm 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.

Asia equity markets suffer virus backlash

The emergence of a heavily mutated new strain of Covid-19 in South Africa, and two cases of this variant being detected in Hong Kong today, has sent Asian investors scurrying for the exit door. Equity markets are being heavily sold including US futures, with OTC markets being closed overnight for the Thanksgiving holiday. S&P 500 futures are 0.85% lower, with Nasdaq futures down 0.70% and growth-centric Dow Jones futures tumbling by 1.25%.

In Asia, the Nikkei has collapsed by 2.75% while South Korea’s Kospi is 1.10% lower. Mainland China is faring slightly better with the Shanghai Composite down 0.45%, and there CSI 300 down 0.35%. Hong Kong is suffering a double whammy today, as China property sector fears also resurface and has sent the Hang Seng into a full-on 2.15% retreat.

Regional markets are faring no better, with Singapore 1.30% lower, and Taipei falling by 0.75%. Kuala Lumpur is down 0.45% with Jakarta 0.50% lower. Manila has fallen 0.80% with Bangkok tumbling by 1.0%. The resource-heavy Australian markets are in full retreat today, as both the ASX 200 and All Ordinaries fall by over 1.30%.

European markets, already under pressure from the 4th Covid-19 wave sweeping the Eurozone, are likely to feel the stress even more as the timing of a new variant of Covid-19 could not arrive at a worse time for the Bloc. US markets may see some resilience in the technology/working from home sectors, but the buy-the-dippers are likely to sit today's session out.

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 by 0.08% to 96.71, driven mostly by gains in the Yen.

EUR/USD and GBP/USD are holding steady at 1.1220 and 1.3300 this morning. Their technical picture remains bearish and neither of them is likely to receive any haven inflows. With Europe already capped by its 4th virus wave situation, both will remain sells on any sort of rally.

Elsewhere, USD/JPY has fallen by 0.55% to 114.70 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, USD/CHF falling 0.30% to 93.35. The Canadian, Australian and New Zealand Dollars, bellwethers of commodity and risk sentiment, have unsurprisingly, suffered today. USD/CAD has risen 0.53% to 1.2713, AUD/USD has fallen 0.65% to 0.7140 and NZD/USD is 0.60% lower at 0.6820. 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 by 1.0% today and Asian regional currencies are under some selling pressure as well. USD/IDR and USD/THB have risen by 0.40% 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 today, 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.

Oil in full retreat in Asia

Oil prices have gapped lower in Asia as the South African variant sparks’ growth fears, sending a wave of selling through Asian energy markets. Although gas and coal prices are holding steady, oil prices have tumbled. Brent crude has fallen 1.85% to $80.70 a barrel, and WTI has tumbled 2.0% lower to $76.40 a barrel. Oil is likely to find sellers on any intraday rally today and is in danger of extending losses once Europe and North American markets resume.

Brent crude has resistance at $83.00 which looks unlikely to be retested over the next few sessions. Brent could potentially retest the $78.00 area this afternoon, although I expect the 100-day moving average at $77.00 to hold for now.   WTI’s triple top at $81.30 is now formidable resistance and a fall to $75.00 a barrel area cannot be ruled out. The 100-DMA is critical support, today at $74.40.

Depending on how this virus-led sell-off evolves, and how concerned the WHO is of it, the calculations surrounding the OPEC+ meeting next week could change. OPEC+ has stated repeatedly that one area of caution was the resurgence of Covid-19 eroding oil demand as the grouping raises production. One takeout for sure is that OPEC+ will not increase production above its previously agreed 400,000 bpd target next week, despite the noise from its major customers. At this stage, I do not believe they will look to reign in production, unless the market situation really deteriorates next week, and oil prices experience a much deeper slump.

Gold edges higher

Gold was quiet overnight due to a US holiday and has been surprisingly muted today as risk aversion waves of selling sweep other asset classes in Asia. Gold has risen just 0.50% to $1797.20 an ounce. Part of the reason is likely because traders going long gold in recent times have been so badly whipsawed. The twice burnt mentality means gold maintains its range between $1780.00 and $1810.00 with a bias to the upside.

If US yields tumble today on haven buying, gold could potentially retest $1800.00 and $1810.00 an ounce. It has moved clear of the 50-day, 100-day, and 200-day moving averages are clumped together between $1789.50 and $1793.50 an ounce which form initial support, followed by $1880.00 an ounce.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

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