‘Not going to be normal by September’: taking stock as Delta spreads

When revelers returned to the nightclubs just a minute after midnight to celebrate the lifting of social restrictions in England on Monday, investors were less cheering.

Instead, they watched a global sell-off unfold in equity markets, pushing down many of the sectors that had pushed global stocks higher earlier this year, some of them in correction territory – 10 percent below their highs.

The reopening of England heightened fears among some investors about rising cases of the Delta variant. The European Stoxx 600 index had its worst trading period of the year. In the USA, where the Delta variant is now also spreading, the S&P 500 lost 1.6 percent.

The seemingly unstoppable uptrend in the S&P 500 and other stock indices over the past few weeks had denied the turmoil simmering just below the surface. The euphoria generated by the vaccine rollouts this year has subsided and has been replaced by creeping concerns about the durability of the economic recovery.

“This virus [variant] is spreading rapidly. A collective eye has opened that this could delay things, ”said Alex Veroude, chief investment officer, North America, Insight Investment.

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“Many had hoped that we would return to normal in September. In September it won’t be normal. Will it be that bad in September? No, but it won’t be normal. “

The losses were mainly focused on cyclical sectors that go up and down with changes in the overall economy. These industries were the main beneficiaries of the reopening of trade, but that trade has started to disintegrate.

For example, the Dow Jones Transportation Average, which includes big names like shipping giant FedEx and railroad operator Kansas City Southern, slipped into a technical correction on Friday last week. Worse still, the major airlines in the index fared, falling into a bear market, defined as a decline of more than 20 percent from their peak.

Other areas closely related to US expansion have also been hit hard. Companies in the raw materials sector are down more than 11 percent from a recent high, while chemicals maker Dow lost 19 percent over the period. Energy stocks fell 4 percent on Monday, the sixth straight losing day.

The Russell 2000 Index could have been a canary in a coal mine. It measures small and medium-sized businesses, which tend to be particularly sensitive to changes in the US growth rate, and investors began to piss off about them months ago rather than weeks ago. It hit an all-time high in March and has been walking on water since then. The 1.5 percent decline on Monday resulted in a loss from that high to just under 10 percent.

Since investor inflation expectations peaked in mid-May, more than half of the companies in the S&P 500 have depreciated and 16 percent are down more than 10 percent. The broader Russell 3000 – the 1,000 largest companies plus Russell 2000 – had at least 24 percent of its constituent parts in the correction area as of Monday.

Morgan Stanley strategists on Monday warned that the pace of economic recovery in the US was unsustainable and advised clients to take a more defensive approach to investing.

“There’s no doubt that things like eating out, live entertainment, and travel need to be caught up,” said Michael Wilson of the bank, but after moving into cars, furniture, and home improvement, consumers have less need to repeat these purchases. “It is… It was clear that the demand was massively pulled forward.”

Investors have moved to hedge against further price falls in the stock markets by buying put options that would pay off if stocks fell. The so-called put-call ratio, which measures the number of put contracts bought compared to the number of call options bought on a given day, reached its highest level since mid-May on Monday.

“What is happening today revolves around this Delta variant and a horror that is completely understandable, since the cases occur in all 50 states,” said David Kelly, strategist at JPMorgan Asset Management. “

Investors have sought the relative safety of US Treasuries, pushing benchmark ten-year bond yields below 1.2 percent on Monday, their lowest level since February. Real yields, which hide the impact of inflation on yields, fell to minus 1.12 percent for 10-year government bonds, their lowest level since January.

Both data points were picked up by the bears as harbingers of a rapid economic slowdown, as was the flattening of the yield curve: the gap between the yields of long-term and short-term government bonds has also been narrowest since the beginning of February.

The flattening of the curve has dampened investor enthusiasm for bank profitability, based on the crude thesis that it narrowed the gap between what they pay to bring in cash and what they can make from lending.

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A slower-than-expected economy, meanwhile, bodes well for the demand for credit among its customers. Sluggish credit growth was a feature of the sector’s earnings in the second quarter last week.

As a result, US bank stocks are down 14 percent from a June high. Bank of America stocks are down 15 percent from their recent high, while Citigroup is down 19 percent.

Mike Lewis, head of US equity cash trading at Barclays, said that while he expected the stock market decline to be short-lived, investors were no longer holding onto a strong V-shaped rebound.

“It is clear that investors think the rebound could take a little longer and reopening trading may not be as attractive,” he said.

source https://thedailytradingnews.com/not-going-to-be-normal-by-september-taking-stock-as-delta-spreads/