By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Of Delta & Decoupling …
Headlines fretting continued;
i) outbreak across Asia,
ii) UK “Freedom Day” in UK colliding with rising cases, and;
iii) US not spared the pain of grappling with “delta” infiltrating the unvaccinated segments population make it abundantly clear that “delta risks” still occupy, if not dominate.
Of course, earnings season also obfuscate the “risk transmission” in equities. And so that suggests that this may be a case of (parts of) markets de-coupling from, and not outright dismissing, the direct “risk off” impact of “delta risks”.
Apart from opportunistic buying the dips in equities, a key catalyst for resounding rebound in equities may even have been driven by side bets of policy normalisation deferred by delta.
Insofar that this is deemed as liquidity boost more than offsetting recovery setbacks, the case for equities to be buoyed in the face of “delta risks” is not irreconcilable.
In turn, this squares with the shattering drop in 10Y UST yield, which remains materially lower at 1.22% despite scaling back up from the sub-1.2% dips earlier.
One of the biggest tells that the equity market bounce is not devoid of “delta risks” is that the Greenback continues to be boosted despite softer yields (both nominal and real).
Point being, the underlying safe-haven demand is reflected in the juxtaposition of a stronger USD and softer UST yields; even as equities recover far more meaningfully.
And within the FX landscape, the contours of “delta risks” are revealed.
Since end of last week, only JPY, a safe-haven in its own right, is holding ground ~110). EUR has stumbled a bit more (~0.3%), to below 1.18; with GBP down more sharply (by >1%) testing 1.36-figure as delta risks amid “Freedom Day” are laid bare.
AUD has taken it on the chin with a test of 0.73 on extended/expanded lockdown across NSW, Victoria and Southern Australia, while Singapore regressing back into lockdown lite has SGD down 0.7% (USD/SGD elevated above mid-1.36 despite off 1.37 test).
… A Matter of Degree
To be absolutely clear, neither the real economy nor the broader markets will decouple from “delta risks” at the most fundamental level; especially as global outbreaks play out.
But the confluence of;
i) “forward looking” market dynamically pricing in vaccine rollout alongside;
ii) the perverse boost from anticipated policy stimulus; means that a one-way, one-size-fits-all type of “risk off” market is not quite the outcome either.
Instead, the tricky thing may be to determine the degree to which particular assets and economies are able to decouple from wider global delta risks; which may in turn hinge on a host of fluid factors such as vaccine penetration/efficacy, healthcare capacity/capability, tourism dependence, fiscal capacity/efficacy etc.
Australia’s June retail sales disappointment is a case in point insofar that; relatively low vaccine penetration colliding with fizzling fiscal boost and fresh delta outbreaks rob AUD of the marginal boost from recovery in commodity prices led by Oil.
The big picture is that in a situation with delta risks swirling, markets buffer from policy accommodation hopes rather than vaccines is tenuous; and warns of further volatility.
Credit: Mizuho Bank Ltd