Stocks sank Friday, with the Dow Jones Industrial Average briefly falling more than 1,000 points, as a new coronavirus variant first detected in South Africa appeared to be spreading across the globe. Investors were uncertain whether the variant could potentially reverse months of progress at getting the COVID-19 pandemic under control.
Canada’s main stock index on Friday posted its biggest decline in more than one year, weighed by a sharp decline in energy shares, as investors worried that a possibly vaccine-resistant coronavirus variant could hinder the global economic recovery.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 487.28 points, or 2.25%, at 21,125.90, its biggest decline since October 2020.
U.S. markets also slumped, with volumes thinner than usual in a shortened post-Thanksgiving holiday session.
The European Union and Britain were among those tightening border controls as researchers sought to establish if the variant, discovered in South Africa, was vaccine resistant.
“Global stocks are under pressure driven by fears that a new COVID-19 variant identified in South Africa could disrupt the economic recovery,” said Angelo Kourkafas, investment strategist at Edward Jones. “Given the uncertainty and because equities have had a very strong year so far, the initial reaction from investors is to cut risk and gravitate towards safe-haven assets like bonds.”
Canada’s 10-year yield tumbled 18.5 basis points to 1.579% as investors dialed back expectations for Bank of Canada interest rate hikes next year.
For the week, the TSX was down nearly 2%. It was the second straight weekly decline for the index, interrupting a record-breaking rally.
The TSX has climbed 21.2% since the start of the year.
“Our initial take is that while the new variant can lead to more travel restrictions and a step back in the global reopening, it is unlikely to derail the bull market,” Kourkafas said.
The energy group on Friday slumped 5.9% as crude oil prices settled 13.1% lower.
Travel-related stocks were also hit particularly hard, with Air Canada ending down 8.9%.
The heavily weighted financials group fell 1.9%, while the materials group, which includes precious and base metals miners and fertilizer companies, was down 2%.Unofficially, the Dow Jones Industrial Average closed down 2.53% at 34,899.34 in its largest percentage drop in more than a year. The S&P 500 lost 2.27%, its worst one-day drop since Feb. 25, and the Nasdaq Composite dropped 2.23%, the biggest one-day route in two months.
U.S. markets closed early on Friday after being shut all day on Thursday for the Thanksgiving holiday.
The index was dragged lower by everything from banks, travel companies and energy companies as investors tried to reposition to protect themselves financially from the new variant. The World Health Organization called the variant “highly transmissible.”
The price of oil fell about 13%, the biggest decline since early in the pandemic, amid worries of another slowdown in the global economy. That in turn dragged down energy stocks. Exxon shares fell 3.5% while Chevron fell 2.3%.
The blue chips closed down 905.04 points to end the day at 34,899.34. The Nasdaq Composite lost 353.57 points, or 2.2%, to 15,491.66.
“Investors are likely to shoot first and ask questions later until more is known,” Jeffrey Halley of Oanda said in a report. That was evident from the action in the bond market, where the yield on the 10-year Treasury note fell to 1.48% from 1.64% on Wednesday. As a result, banks took some of the heaviest losses. JPMorgan Chase dropped 3%.
There have been other variants of the coronavirus — the delta variant devastated much of the U.S. throughout the summer — and investors, public officials and the general public are jittery about any new variant that’s spreading. It’s been nearly two years since COVID-19 emerged, killing more than 5 million people around the globe so far.
Cases of the new variant were found in Hong Kong, Belgium and Tel Aviv as well as major South African cities like Johannesburg.
The economic impacts of this variant were already being felt. The European Union and the U.K. both announced travel restrictions from southern Africa on Friday. After the market closed, the U.S. also put travel restrictions on those coming from South Africa as well as seven other African nations.
Airline stocks quickly sold off, with United Airlines dropping 9.6% and American Airlines falling 8.8%.
“COVID had seemingly been put in the rear-view mirror by financial markets until recently,” Douglas Porter, chief economist at BMO Capital Markets. “At the least, (the virus) is likely to continue throwing sand in the gears of the global economy in 2022, restraining the recovery (and) keeping kinks in the supply chain.”
Even Bitcoin got caught up in the selling. The digital currency dropped 8.4% to $54,179, according to CoinDesk.
One sign of Wall Street’s anxiety was the VIX, the market’s measurement of volatility that is sometimes referred to as its “fear gauge.” The VIX jumped 53.6% to a reading of 28.54, its highest reading since January before the vaccines began to be widely distributed.
Fearful of more lockdowns and travel bans, investors moved money into companies that largely benefited from previous waves, like Zoom Communications for meetings or Peloton for at-home exercise equipment. Shares in both companies rose nearly 6%.
The coronavirus vaccine manufacturers were among the biggest beneficiaries of the emergence of this new variant and the subsequent investor reaction. Pfizer shares rose more than 6% while Moderna shares jumped more than 20%.
Merck shares fell 3.8%, however. While U.S. health officials said Merck’s experimental treatment of COVID-19 was effective, data showed the pill was not as effective at keeping patients out of the hospital as originally thought.
Investors are worried that the supply chain issues that have impacted global markets for months will worsen. Ports and freight yards are vulnerable and could be shut by new, localized outbreaks.
“Supply chains are already stretched,” said Neil Shearing, an economist with Capital Economics in London. “A new, more dangerous, virus wave could cause some workers to temporarily exit the workforce, and deter others from returning, making current labor shortages worse.”
The variant also puts more pressure on central banks that are already faced with a dilemma: whether and when to raise interest rates to combat rising inflation. “The threat of a new, more serious, variant of the virus may be a reason for central banks to postpone plans to raise interest rates until the picture becomes clearer,” Shearing said.
Stock trading the Friday after Thanksgiving is typically the slowest day of the year, with the market closing at 1 p.m. Eastern. However volume on Friday was much higher than it would typically be for a holiday-shortened day. Roughly 3.4 billion shares exchanged hands on the New York Stock Exchange, which is only modestly below the 4 billion shares traded on an average day.
The Associated Press and Reuters
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