28 January 2022 7:51

Market Mantra: Is it start of downturn due to new virus variant as Australian shares record sharp fall

Investors are currently in shoot first and asking questions later until more is known about the new variant, the investors are also nervous about whether we will even get a Christmas rally.

A worrying new and possibly vaccine-resistant COVID-19 variant unnerved the investors and sent Australian shares tumbling for a third week in a row.

Despite better than expected retail sales data, the Australian shares recorded their worst session in two months on Friday with all major sectors tumbling.

With investors seriously concerned about the new virus and possible lockdowns in the near future, every sector was sold on Friday with only 14 stocks recording a rise. The energy stocks, travel sector, and bank shares were all hit as with fears of lockdowns there are also concerns economic activity will reduce.

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With investors currently in shoot first and asking questions later until more is known about the new variant, the investors are also nervous about whether we will even get a Christmas rally.

The futures for Australia are down 104 points or 1.4% for Monday open and set to continue with the decline.  The projected drop on Monday after Friday’s decline will mark Australia’s biggest fall in two consecutive sessions in more than 18 months.

Market Mantra: Down turn; Picture Source: @CANVA
Market Mantra: Downturn; Picture Source: @CANVA

The fall in future prices for Australian shares very strongly indicates that the investors are unclear about the implications of longer-term implications of the Omicron variant on Australian markets. With signs that the new strain is spreading and questions over its resistance to vaccines it is highly likely that it will continue to weigh in on market sentiment till we get further clarity on the new virus variant.

According to Ryan Detrick, chief marketing strategist for LPL Financial “Investors are selling in front of bad news. The economic recovery has been quite impressive and the one thing that could knock it over completely would be a more dangerous variant.”

Many analysts believe that should the new strain trigger the reimposition of mass social restrictions it could truly derail the economic recovery. With the delta wave fresh in minds of investors it is likely that the sell-down will continue.

Looking forward to this week the investors will be looking forward to the GDP data on Wednesday. We believe though that with Sydney and Melbourne being in lockdown for the most part of the third quarter the GDP numbers will likely be negative and may push the market further South.

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It will also be a fairly busy week overseas with US non-farm payrolls, employment and unemployment figures, manufacturing figures, new car sales, and home sales all coming out this week.

Melbourne Airport Terminal 1 1
Image: Wikipedia.

The resurgent concerns over the spread of a new variant of coronavirus sent traders scrambling to safe haven. As such the appeal of gold as safe haven drove traders towards the safety of the yellow metal.

The new variant from South Africa possibly evades immune responses and has resulted in travel bans by Britain, European Union, and Australia from the African nation. Markets are scared the new variant will impact the economy more strongly than the Delta strain and this has spurred demand for the safe bullion.

The rise on Friday though was still not enough to save gold from recording the worst weekly decline for gold since August 6 on increased expectations that the US Federal Reserve will raise interest rates at a faster pace.

However, the new virus-driven economic uncertainty is expected to slow down Fed Reserve’s plan to normalize the monetary policy thus boosting appeal for gold.

Australian Gold; Picture Source: @CANVA
Australian Gold; Picture Source: @CANVA

Oil prices posted a fifth consecutive weekly drop last week and recorded their largest single-day April 2020 on Friday as the resurgence of lockdown fears due to the new coronavirus variant added to concerns that the supply surplus could grow due to a demand slowdown just as supply increases.

Although WHO said that further investigation is needed to determine if the new variant is more resistant to the vaccines it was enough for traders to sell oil on the concern of a decrease in travel and potential new lockdowns, both of which could hit demand.

With most European nations and Australia now limiting travel from several nations affected by the new variant the oil prices may continue to fall as the last thing the oil complex would need is another threat to the air travel recovery.

Petrol bowser filling car e1556173592905 2

Oil traders this week will be keeping a keen eye on the OPEC+ meeting on Thursday. The OPEC+ nations will decide whether it will continue with its plan to add 400,000 barrels a day to production quotas in January 2022. Many analysts believe that the new virus and release of oil from reserves by the US, India, and China could result in OPEC+ nations suspending its output hike.

In regards to the local currency, the Australian Dollar continued to slump for a fourth consecutive week amid coronavirus-led risk aversion which is in full swing.

Traders ignored an upbeat retail sales data as fresh coronavirus woes from Africa and Eurozone kept sentiments sour.

The Australian Dollar continues to look extremely bearish against most currencies as traders react to the Omicron variant of coronavirus, which is seen as a risk-off event. As long as the negative impact of the new variant remains in the market traders will be much more comfortable holding the safer currencies such as the US Dollar, Japanese Yen, and Swiss Franc as opposed to the risk currency such as the Australian Dollar.

Technically speaking the commodity currency against the greenback has broken below the 200-week MA and the momentum is strongly bearish. The market looks set to test support at 0.70 level and if the bears capture it then the Aussie dollar is looking towards 0.68 level against the USD over the longer term.

Australian-Dollar; Picture Source: @CANVA
Australian-Dollar; Picture Source: @CANVA

At this stage, any rally in the local currency will be an opportunity to sell further and should be treated as such. However, keep in mind this is based on current risk sentiment in the market. Any positive news in regards to the new variant can quickly change the risk appetite of the market and send the Aussie back up.

The markets around the world were shaken by news regarding new coronavirus derivatives. The Indian Rupee was no different. With news of the new mutation, investors fled from riskier currencies resulting in the Rupee recording its worst week since October 8th.

With people concerned that the new variant might cause even more economic destruction the Indian shares plunged pushing the currency further lower with the market expecting RBI to get more cautious due to uncertainty.

In the world of cryptocurrencies, the crypto market followed world markets lower with Bitcoin hovering around two-month lows at the US $54,000.

Bitcoin 2 3

On Monday the digital currency opened at $57K. It then rallied to $59K and by Thursday was looking prime to take over the US $60 K.

However, with a new coronavirus variant emerging the bears rediscovered their mojo and sent BTC tumbling to US$54K.

With uncertainty in the air following renewed lockdown worries and the proposed ban of cryptocurrencies in India, the next couple of weeks will be crucial for cryptocurrencies.

The Altcoins also took a major blow however some of them managed to hold their ground. BNB was up about 10%, CRO 41% for the week and AVAX recorded 10% weekly gains. The metaverse coins also continued to be a rage last week with both Sandbox and Decentraland (MANA) recording strong rallies.

However, at this stage, we think it would be best to sit on the sidelines and see how the market shapes up in the following days and if the correction will most likely worsen or we will get a recovery in the crypto space.

In agricultural products, wheat and corn continued to rally as export sales for both beat record expectations.

The corn exports from the US to Mexico and Canada were up 58% from the previous week while the wheat imports for Japan and Nigeria were up 42% from the week before.

The wheat imports from importing nations have now been up 70% from the prior 4-week average.

The price of soybean however declined for the week as the new COVID variant weighed on world markets. With authorities in European Union, Britain, India, and Australia announcing stricter border control as scientists scramble to find more information about the new variant the demand for oilseed commodities took a hit.

Author: Ateev Dang is a trader and trading coach by profession. He runs his own business called Glow trades Pty Ltd where he teaches anyone who is interested in starting their trading journey how to trade. He can be contacted at [email protected].

Disclaimer:

The writers’ opinions in the above article are their own and do not constitute any financial advice whatsoever. Nothing published by The Australia Today constitutes an investment recommendation, nor should any data or content publication be relied upon for providing any investment activities.

We strongly recommend that you perform your own independent research and/or speak with a financial advisor or qualified investment professional before making any financial decisions.

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