Downdraft Continues

August 20, 2021
  • Delta variant and China crackdowns continue to weigh on sentiment
  • MSCI Asia Pacific falls to the lowest level since December
  • Australia and New Zealand extend lockdowns

The same themes and price action direction prevailed overnight: delta-virus triggered selloff continues across assets combined with China’s crackdown against the tech sector. The Australian and New Zeeland dollars are underperforming (see below), hit by increasing concerns about infections and declining commodity prices. Both countries seem poorly prepared – perhaps even complacent – going into the delta virus with vaccination rates far belowother major countries. Only 22% of the population in Australia and 22% of New Zealand’s population received the two doses. This compares to numbers of 50-67% in other developed countries.

Stocks were down across the board in Asia, with the MSCI’s Asia-Pacific Index at the lowest level since December. The MSCI EM index has been underperforming over the last few weeks but accelerated this week, falling 5% (as of London morning prices). Losses were widespread across the world, with the EuroStoxx 600 down 2.2% on the week. U.S. indices are outperforming but still down about 1.5%. In typical fashion, the dollar is appreciating against most major currencies apart from safe-havens CHF and JPY, with commodity currencies down the most.


Yesterday’s data out of the U.S. was mixed with better jobless claims but a weaker Philly Fed index. On the jobs side, it was a good reading for initial claims (348K). Continuing claims are reported with a one-week lag, so next week’s reading will be for the survey this week. Both are at pandemic lows now, and the signs so far point to another robust jobs report for August. Consensus is currently 750k vs. 943k in July, but this will change as we get more clues. The Philly Fed index came in at 19.4, slightly lower than the consensus 23.1 but still relatively high. All of the survey and PMI readings for the US are still at or near record highs. So the economy may be slowing but still growing at an above-trend pace.

U.S. Treasury yields have been playing along with the worsening of risk appetite, but the moves seem less expressive than those in the equity space. The 10-year yield has been moving lower over the last few sessions to 1.23% , but still well within the range for the month. The same goes for the yield curve, which has been flattening but not dramatically so.



UK’s retail sales came in much lower than expected, though it might be too early to draw strong inferences. The July reading fell to 2.4% y/y, compared to 9.7% in June and 5.9% forecast, suggesting that the re-opening boost has not yet materialized. It’s hard to say whether this is just a delay in households using their newly amassed savings, a change in spending patterns, or still low confidence given the delta variant and end of the furlough program. The potential is there for a rebound, but time will tell.



The resurgence in virus concerns in Antipodean nations prompting the expected toughening of mobility restrictions. In Australia, the two-month lockdown in Sydney will be extended until the end of September, at least, including curfews in some areas. In New Zealand, the delta variant was detected outside Auckland, and the case count has risen to 31. The government reacted by extending the lockdowns by 4 days. All this leads to a pushback in expected tightening by the RBNZ and RBA and weighs on the currencies. AUD is now the worst-performing G10 currency this year (-7.4%), and NZD is not far behind (-5.1%).


The PBoC kept its rates on hold in China, but regulators have started aiming the tech crackdown on the health sector. The 1-year Loan Prime Rate (LPR) was unchanged at 3.85%, the same level since mid-2020, and will likely remain there for some time. We think officials are comfortable with the level of accommodation, and further tweaks will happen through the reserve requirement ratio. On the regulatory side, the government is now calling for stronger oversight on the health sector, including pharmacies and cosmetic companies. This follows several other similar initiatives against big tech and the education sector. 

Local news wires report that the Chinese government decided to postpone the controversial anti-sanctions low on Hong Kong. This comes as a surprise, especially the statement language about the government wanting to “listen to further views on the matter.” The backdown might be a sign that officials have become more sensitive to the fallout caused by the original motion, which would allow Mainland to seize assets and block business transactions if perceived as a threat. The Hang Seng is one of the worst-performing indices this year, down 9%.


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