A new Covid alert is rethinking market rates
Risks of a new covid blow to economic activity crush expectations of rate hikes next year from the world’s major central banks, a potential pullback for the dollar and other currencies where the bets had been the most aggressive.
Money markets no longer fully take into account a 25 basis point interest rate hike by the Federal Reserve by June 2022, nor are they positioned for a full 10 basis point hike by the Central Bank European Union by the end of 2022, as they were only a few days ago.
And the odds that the Bank of England will hike rates next month are around 53%, down from 75% on Thursday.
The changes come after the detection of a new variant of the coronavirus in South Africa triggered stricter border checks from several governments, as scientists sought to determine whether the mutation was resistant to the vaccine.
“While the central bank’s comments focused on the upside risks to inflation, this (new covid variant) shows that there are significant downside risks and that we are in an important phase of uncertainty for the economy “, said Chris Scicluna, head of economic research at Daiwa.
Echoing the panic that swept through the markets as the covid spread early last year, Oil prices fell more than 6% on Friday, travel industry stocks posted declines of 6% or more, and two-year US Treasury yields fell 12 basis points on their over sharp daily decline since March 2020.
Forex traders favored the US dollar and others where the outlook for rate hikes appeared strong, driven by higher inflation and stronger economies. Now a shakeout appears on the cards