European shares fell 2 per cent on Monday, the dollar strengthened and market volatility surged amid growing unease over the economic impact of a new coronavirus strain in Britain which has seen several European countries shut their borders to the UK.
The news of the new strain, said to be up to 70 per cent more transmissible than the original, has put some 16 million Britons under tougher lockdowns and has overshadowed US lawmakers’ agreement over a long-awaited stimulus bill.
UK prime minister Boris Johnson will chair an emergency response meeting to discuss international travel and the flow of freight in and out of Britain.
Coinciding with the lack of a post-Brexit trade deal ahead of the December 31st deadline, those developments sent the pound almost 2 per cent lower at $1.3272. Losses of more than 1 per cent on UK equities were led by 6 per cent-7 per cent tumbles at banks Lloyds and Barclays.
German shares fell around 2 per cent, while pan-European travel and leisure stocks lost more than 5 per cent.
MUFG analysts noted the tougher restrictions might have to remain place for months until more people are vaccinated.
“As a result, the economic slowdown will prove deeper and extend further into next year. It will dampen optimism over a stronger economic recovery in 2021,” they told clients, noting this setback could necessitate more monetary stimulus.
Volatility, a measure of price swings on an asset class, swung higher across the board, with Wall Street’s “fear gauge” the VIX - rising above 25 per cent for the first time since December 11th.
Earlier, Asian shares outside Japan dipped 0.2 per cent after hitting a string of record peaks last week. Japan’s Nikkei shed 0.4 per cent, off its highest since April 1991.
Futures for the S&P 500 were down 0.6 per cent, despite opening stronger after US Senate majority leader Mitch McConnell said an agreement had been reached by congressional leaders on a roughly $900 billion Covid-19 relief bill.
The setback could upend bullish bets on commodities such as oil and copper which were expected to benefit from a growth upswing next year.
Brent crude futures dropped more than 3 per cent while copper, a key economic growth barometer, fell off the $8000-per-tonne mark it recently scaled for the first time since 2013.
“Investors’ rosy expectations for 2021 have suddenly vanished due to a new variant of the virus,” Kazuhiko Saito, chief analyst at commodities broker Fujitomi Co, said.
The risk-off picture provided a boost to safe-haven assets, from government bonds to gold to the US dollar. Speculators who had taken bearish dollar positions to the biggest since September, trimmed those in the week to December 15th, data showed on Friday.
The dollar index rose as high as 90.68, up almost half a percent, well off last week’s 89.723 level that marked the lowest since April 2018.
The euro edged lower at $1.222 while the yen firmed slightly at 103.5 per dollar.
The greenback also found support from a Nikkei report that Japanese prime minister Yoshihide Suga had told officials to ensure the dollar did not fall below 100 yen.
Gold prices meanwhile climbed to six-week highs at $1,896 an ounce while US and German bonds rallied, with yields down three to four basis points.
The US two-year/10-year Treasury yield curve, another important gauge of growth expectations, flattened a touch. The curve had steepened on Friday to the highest levels in almost three years amid optimism about the stimulus bill. – Reuters
