The Delta Hedge

The pattern in markets is growing increasingly clear and tougher to separate from covid worries. Risk went from aversion on Friday to the sharpest decline in over 9 months amid surging worries that the Delta virus variant may not be sufficiently contained by the ongoing vaccines, especially as countries look to further re-open their economies. Flows continued to bleed out of equities, seeking refuge in bonds, driving down the US 10 yr yield under 1.20% and lifted the yen above all other currencies, while gold remained stable and silver plunged. Surging geopolitical tensions between the US and China slowed the USD rally (see Ashraf's tweet below).  Keep a close eye on the S&P500's 55-DMA near 4230/35.

For the past year, the trade has been to ignore covid and look towards the reopening but now that the US, UK and others are open, the price action is reversing. Perhaps that's the typical 'sell the fact' move with a strong economic recovery already priced in and risks surrounding the Fed and spending creeping in.

What's puzzling is that some of those concerns should have eased last week on a number of strong data points. One of them was Friday's US retail sales report, which showed sales up 0.6% compared to a -0.4% reading expected. Digging deeper, the reopening themes like food services and restaurants were strong, rising another 2.3%.

To be fair, everyone has been scratching their heads since Treasury yields sank in late June. What's staring right back is the virus, which is killing a record number of people in Russia, Indonesia and elsewhere.

In the Netherlands, cases were at 500 per day in late June as they reopened and have exploded to 11,000 per day, which is higher than all-but-a-few days from December. The delta variant is wreaking havoc.

We're sympathetic to arguments about lower hospitalizations and economies adapting to curbs but fear the market is turning its focus to long-term covid worries and the chance possibility it will be endemic but with ever-more dangerous variants emerging. The picture might be a new normal that is further from the old normal we're all hoping for than anticipated.

Moreover, traditional vaccines are losing traction and acceptance. Shares of Moderna have surged in the past week. Hopefully that's a signal of the wonderful potential of MRNA drugs but it can be read as a sign that only MRNA vaccines will be effective against covid and that we will need repeated booster shots.

For now, it remains early to be making judgement calls but the price action is making a more-compelling case by the day.