How Will The Delta Variant Impact The Markets?

The COVID-19 pandemic brought the financial world to its knees in 2020. Steep sell-offs in equities and commodities plagued the markets as capitulation became a theme for March and April of 2020. Later in the year, a second wave of COVID-19 infections (1 July - 15 October)^[1] returned investor angst to the markets. By late-October, the Chicago Board of Trade's (CBOE) Volatility Index (VIX) posted a reading near 40.00^[2]—the highest level of Wall Street's "fear gauge" since March's initial stages of the contagion.

Despite the COVID-19 second wave that occurred in the fall of 2020, the markets approached the coming year with optimism. New vaccines were coming and hopes of containing the virus in 2021 grew. However, medical experts warned of forthcoming viral mutations of COVID-19. During the summer of 2021, a voracious spread of the Delta variant became a primary concern of health and financial experts worldwide.

What Is The Delta Variant?

In virology, a variant is defined as being the genetic mutation of a known disease. According to the Centers for Disease Control and Prevention (CDC), SARS-CoV-2, the virus that causes COVID-19, is constantly changing; these genetic variations can lead to the emergence of new COVID-19 variants.^[3] Each variant presents a unique collection of characteristics, and each can be either stronger or weaker than the original SARS-CoV-2 virus.

The Delta variant, labelled B.1.617.2, is a highly contagious strain of SARS-CoV-2 that was first identified in India during December 2020.^[4] From its origins, Delta extended its reach globally, spreading from China to the U.K. Eventually, the strain was detected in the U.S. in March 2021. By early June, China reinstated aggressive testing and travel restrictions while locking down 15 million people in Guangzhou, Guangdong province.^[5]

As of this writing (July 2021), it's difficult to have a comprehensive understanding of the relatively new SARS-CoV-2 Delta variant. Nonetheless, some tendencies are evident. The experts at Yale Medicine put forth a few early observations regarding Delta:^[4]

• Delta is more contagious than other SARS-CoV-2 variants.
• Individuals who aren't fully vaccinated against COVID-19 appear to be at greater risk of infection.
• Delta may lead to regional outbreaks, which could overwhelm local health care facilities.
• Uncertainty still surrounds the severity, symptoms and overall reach of the virus.

By late-June, Delta was identified in more than 92 countries and became the dominant form of COVID-19, making up at least 10% of all new cases in the U.S.^[6]

Initial Market Impact Of Delta

The Delta variant first garnered the attention of market participants with the early-June Chinese Guangdong lockdowns. Over the subsequent month, the capital market participants began to "price in" the potential impact of Delta across the board. From 1 June 2021 to 30 June, the capital markets reacted much as they did to initial COVID-19 shock:^[7]

• Forex: The United States dollar (USD) gained ground versus the forex majors. The EUR/USD (-3.01%), USD/CHF (+2.94%), USD/CAD (+2.79%), AUD/USD (-2.99%) and USD/JPY (+1.43%) all trended in favour of the dollar. While not as extreme as March 2020, investors began to favour the USD as a safe-haven during the emergence of Delta.
• Equities: The Dow Jones Industrial Average (DJIA) (+0.34%) traded flat as investors mulled growing uncertainty. However, the S&P 500 (+2.62%) and NASDAQ 100 (+6.53%) both posted solid gains. The tech and growth-oriented NASDAQ posted a robust month as the chances of widespread lockdowns and quarantines grew.
• Commodities: Gold (-7.14%) posted an unexpectedly negative month during the onset of Delta. Although gold is a traditional safe-haven, sentiment turned bearish as the USD gained preferential status among concerned investors.

Note: Past performance is not an indicator of future results.

While the market behaviour of June 2021 was tame in comparison to the COVID panic of March 2020, investors did take notice of Delta. This trend grew more pronounced during the tumultuous session of Monday, 19 July 2021.

On Friday, 16 July, the CDC issued an ominous statement regarding exploding COVID-19 cases. The CDC reported that U.S. cases of COVID-19 were up 70% week-over-week, with deaths also increasing by 26%.^[8] During the press conference, CDC Director Rochelle Walensky announced that the seven-day average of U.S. daily cases spiked to more than 26,000, up from June's low of 11,000.

In addition, U.S. infectious disease expert Anthony Fauci stressed that the Delta variant was culpable for the outbreak, reiterating that the virus was present in 100 countries and ranked as the top variant worldwide.^[8]

The Monday, 19 July 2021 session proved that the markets remained aware of COVID-19 and the potential impact of Delta:^[7]

• Forex: For the session, volatility was prevalent as the EUR/USD (-0.04%), GBP/USD (-0.60%), USD/CAD (+1.08%) and AUD/USD (-0.68%) all favoured the greenback. However, forex traders flooded into the traditional safe-haven currencies with the USD/CHF (-0.16%) and USD/JPY (-0.54%) trending in favour of the Swiss franc and Japanese yen.
• Equities: American stock indices posted their worst day since October 2020. The DJIA (-1.85%), S&P 500 (-1.34%), Russell 2000 (-0.99%) and NASDAQ (-0.52%) all sustained substantial losses. Global indices were bearish as well, with the CAC 40 (-2.54%), DAX (-2.62%) and FTSE 100 (-2.01%) all closing deep in the red.
• Commodities: One of the largest indicators that Delta had the attention of traders and investors was the sudden downturn in global oil prices. On the day, West Texas Intermediate (WTI) and North Sea Brent (Brent) crude oil futures plunged (-6.80%) and (-5.96%), respectively. With the possibility of demand going offline due to fresh Delta-prompted global lockdowns, energies took a decisive hit.

Note: Past performance is not an indicator of future results.

The 19 July 2021 trading session illustrated that the markets remained sensitive to the potential impacts of COVID-19. While additional underpinnings such as monetary policy and geopolitical tensions certainly contributed to the day's volatility, the prospect of Delta becoming a game-changer drove vast participation to the markets.

Potential Market Impact Of Delta

Over the course of the COVID-19 pandemic, the world's capital markets have experienced nearly unprecedented tumult. During the first stages of the contagion, a full-blown financial panic ensued. As fears receded, asset values rebounded and many reached new heights. Nonetheless, fallout from the Delta variant may bring about several financial scenarios local to COVID-19 market behaviour. Below are a few potential market impacts of the Delta variant.

1. Forex

The pricing of forex currency pairs was multifaceted during the 2020/21 COVID-19 era. First, investors fled to the U.S. dollar as a safe-haven. In March 2020, the USD Index reached a level of 102.99, its highest value since 2017.^[9] However, the USD Index closed March 2021 at 93.28, down 9.4% from COVID panic highs.

Among the key market drivers of the USD's decline versus the global majors was dovish monetary policy from the United States Federal Reserve (Fed). To combat the economic fallout from COVID-19, the Fed adopted a policy of unlimited QE, which consisted of 0% interest rates and billions in asset purchases.^[10] Should Delta evolve into a major economic threat, similar Fed actions are probable.

2. Equities

March 2020 brought one of the worst months in history for the DJIA (-15.21%), S&P 500 (-13.96%) and NASDAQ (-8.86%).^[7] Global indices followed suit, with the CAC 40 (-18.89%), DAX (-16.44%) and FTSE 100 (-16.35%) all crashing.^[7] The short-term damage posed to global equities by the onset of COVID-19 was historically severe. Despite the initial strife, however, the global equities markets rebounded as 2020 progressed.

Note: Past performance is not an indicator of future results.

Sweeping, extended Delta lockdowns in the U.S. and abroad are likely to cause swift corrections in equities. Also, while the impact of Delta may be severe in the short-run, the 2020/21 COVID-19 stock market recovery indicates that valuations may not remain depressed over time.

3. Commodities

The pricing sensitivity to COVID-19 exhibited by commodities illustrated the seriousness of the financial impact of a pandemic. Metals, energies and agricultural commodities all faced extreme volatility and initial bearish pressure. During March 2020, raw materials such as gold (+1.91%), copper (-12.28%), corn (-7.74%) and soybeans (-0.76%) all posted huge trading ranges.^[7] Nonetheless, the biggest example of COVID-19 commodity market fallout was the -$40.32 per barrel record-low price of WTI crude oil established in April 2020.^[11]

Note: Past performance is not an indicator of future results.

In the world's commodity markets, supply and demand are the primary drivers of asset pricing. If the Delta variant disrupts regional import/export supply chains, then commodity market volatility the likes of March 2020 may come to pass.

Summary

The Delta variant (B.1.617.2) is a highly contagious strain of the SARS-CoV-2 virus. During the spring and early summer of 2021, Delta became the dominant COVID-19 variant worldwide. To combat the spread, various local lockdowns were enacted, prompting significant concern from virology experts as well as the public. The aggregate market sensitivity to the Delta strain became apparent with the financial tumult of Monday, 19 July 2021.

Even though many retail and institutional traders are concerned about Delta, its impact is likely to be much different than witnessed during the initial onslaught of COVID-19. Factors such as vaccines, established safety measures and herd immunity may make extensive lockdowns unnecessary or regional. However, the transmissibility of Delta makes it a potential driver of significant medicinal and financial uncertainty. In the event that the variant prompts 2020-esque global economic shutdowns, the currency, equity and commodity markets will all experience severe volatility.