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Macro Analysis

How the Delta variant will impact the financial markets

July 26, 2021
BY Emma Richards

Many investors experienced a deja vu moment last week as the Delta variant of coronavirus becomes increasingly prevalent across the world. 

First discovered in the Indian state of Maharashtra in October 2020, the new strain is found to be as contagious as chickenpox. The World Health Organisation (WHO) has categorized it as a ‘variant of concern.’ As of today, the Delta variant has spread across as many as 96 countries. 

Recent statistics suggest that the Delta variant accounts for over 90% of the UK’s new Covid-19 cases despite the country’s high vaccination rate. Cases associated with the new coronavirus strain are also becoming more common in countries such as France, Germany and the United States. 

To what extent is the Delta variant a threat?

Amid growing concerns over the rise in Delta infections, the European Stoxx 600 index was down 2.3% on 19th July, suffering from the worst decline since the beginning of 2021. The S&P 500 plunged 2% last week, whilst the Dow Jones Industrial Average plummeted 2.7% and underwent its biggest drop since October 2020.

Meanwhile, pandemic-friendly stocks such as Peloton Interactive Inc. reported a more than 7% surge. The Direxion Work From Home ETF observed a 15% year-to-date increase, outperforming its travel counterpart AWAY, which has experienced an 8% growth since January this year.

Limited influence on global markets

The growing prevalence of the Delta strain has undoubtedly led to a deterioration in investor sentiment. Nevertheless, the uncertainty generated by the new virus variant is unlikely to bring about anything close to a sharp sell-off. 

The vaccine rollout success in developed markets plays a vital role in stabilizing asset prices. Although the UK observes an average of about 20,000 new cases every day, its Covid-related deaths remain as few as approximately 50 per day. The vaccines have effectively prevented severe health threats resulting from Delta infections. 

In fact, the expectations of a strong market recovery, backed by comprehensive stimulus policies introduced to save the hard-hit global economy, have been supporting asset prices even before the launch of vaccination programs. 

The MSCI World index, which reflects the performance of stocks amongst developed countries, jumped at least 20% during the last six months of 2020. The increase took place despite the second wave of Covid-19 in America and Europe. 

As tech stocks thrived thanks to the pandemic, the S&P 500 reached a new high by August 2020 – almost three months before the approval of the world’s first Covid-19 vaccine.

Therefore, it is fair to conclude that the Delta variant is far from a headwind for financial markets. The new virus strain poses questions about the speed of growth and recovery in economies such as China and the United States. However, as the global markets continue to flourish, you don’t have to worry too much about the possibility of profound repercussions.  

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