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New "Nu" COVID Variant Rattles Stock Markets

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COVID-19 nu
COVID-19 nu Getty Images

A new variant of the COVID-19 virus identified recently in Africa has put a scare into most risk assets ahead of Friday's holiday-shortened trading session.

The variant – B.1.1.529, which could be labeled "nu" by the World Health Organization as soon as today – was first identified in either Botswana or South Africa, according to conflicting reports, and has since been detected in Hong Kong as well.

Little is known about the virus, which South Africa fears might be responsible for a recent spike in cases, from 200 daily recently to 2,465 on Thursday. However, U.K. Health Secretary Sajid Javid said at a press conference that this nu variant "may be more transmissible" than delta, which is currently the globe's dominant strain.

But the sudden burst of uncertainty was enough to send markets reeling.

The Dow Jones Industrial Average was off 800 points (-2.3%) ahead of Friday's open, while the S&P 500 was down 79 points (1.7%) and the Nasdaq Composite was lower by 167 points (-1.0%).

"This morning already, there has been a substantial market reaction, with travel-related stocks in particular having been heavily affected," says Deutsche Bank Research Analyst Jonathan Jayarajan. "That comes as countries have moved to tighten restrictions, with the U.K. already adding six countries to its red list, and European Commission President von der Leyen proposing that the emergency brake be activated to stop air travel from southern Africa."

Examples of travel stocks that were getting hit hard Friday morning include Carnival (CCL, -10.0%), American Airlines (AAL, -7.5%) United Airlines (UAL, -8.3%) and Expedia (EXPE, -7.4%).

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"Other assets have also been affected, with investors moving rapidly into safe 7havens such as sovereign bonds, just as they move to push back their expected timing of future rate hikes from central banks as well,"Jayarajan says. "Oil prices have moved sharply lower on the prospect of weaker growth and lower mobility, and West Texas Intermediate (U.S. crude oil) is back beneath $75 per barrel at the time of writing.

Even cryptocurrencies reminded markets that they too are risk assets; Bitcoin, for instance, was off 7.8% to $54,425.

The CBOE Volatility Index, meanwhile, shot 33.0% higher to 25.77 – a level last seen in February of this year.

And naturally, several assets that were popular during the 2020's COVID crash were en vogue Friday morning. COVID vaccine makers Pfizer (PFE, +6.1%) and Moderna (MRNA, +12.7%) were both poised to jump at the open. Popular stay-at-home plays including Zoom Communications (ZM, +9.5%) and Peloton Interactive (PTON, +7.0%) also were signaling significant gains.

Quick Takeaways

The nu COVID variant certainly bears watching, as it could trigger even more worldwide shutdowns and slam the progress of economic recoveries around the globe. In turn, that could also prompt the world's central banks (including the Federal Reserve) to reconsider recent adjustments to tighten monetary policy and delay future rate hikes.

But also worth noting is similar scares, such as with the lambda and mu strains. These variants weren't found to be any more transmissible or dangerous than the delta variant. A similar development with nu COVID could see this downturn reverse course just as quickly.

"The economic recovery has been quite impressive and the one thing that could knock it over completely would be a more dangerous variant," says Ryan Detrick, chief market strategist for broker-dealer LPL Financial. "Time will tell how worried we should be, but investors are selling in front of potential bad news."

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