December 23 2020

Impact of the New Coronavirus Strain On Financial Markets

The new strain of coronavirus pandemic has raised questions over the potential impact on financial markets and whether it would have the same effect of the first Covid-19 wave on major indices and assets, most notably the US dollar index, gold, and Standard & Poor’s 500 index or the Covid-19 vaccine will be a game-changer.

During the first wave, the US dollar was the number one option for seekers of liquidity; however, gold and stocks emerged as better investment choices.

US Dollar: The Most Favorite Refuge During Panics

The new coronavirus strain could have the same impact of the first Covid-19 wave when investors started to rush to safety, more specifically the U.S. dollar that mainly gains during times of panic at the expense of other refuge assets such as the Japanese yen, Swiss franc, and even gold. Investors have so far opted for cash in the U.S. dollar, which is the world’s largest reserve currency.

The dollar index rebounded on Monday from its lowest level since April 2018 hit last week. It is worth mentioning that at the beginning of the first wave, the dollar index soared in March and April and then dropped significantly. So far, the dollar index has lost more than 6% this year, where it had gained 3% during the first four months.

Gold: The Classic Safe Haven

Gold acted positively to the new strain panic at the opening of this week, as it managed to surpass the psychological level of $1,900 an ounce for the first time since November 9. However, the safety demand did not last long as investors preferred cash represented in the green currency, referring that the look for liquidity prompted investors to sell equities, gold, and other assets.

After losing ground to the dollar in February and March this year, with the rising coronavirus infections, gold had surged markedly in April to hit a new all-time high at $2,075 an ounce in August. The yellow metal has succeeded in augmenting 18% in 2020, having the best monthly gain in July with a 10.7% advance.

The graph describes the performance of major investments in 2020 by focusing on the dollar index, gold and S&P 500 index

Potential Effect On Equities

Similar to the first impact of the first corona wave, equities suffered sharp losses during the first quarter of 2020, but then bargain hunters, people who usually buy assets that are cheaper than usual, stepped in to take advantage of the low prices of shares, especially those promising equities of the technological sector.

Meanwhile, European shares are trading sharply lower, as the new COVID mutation resulted in panic and sell off in risky assets. The U.S. benchmark S&P 500 index tumbled 20% in the first quarter this year but reversed direction thereafter to hit a new record high this month, with a gain of more than 12% so far this year.

The new Covid-19 vaccine developed by giant pharmaceutical companies such as Pfizer, Moderna and AstraZeneca

Will the Coronavirus Vaccine Alter This Scenario?

Several countries around the world have started the distribution of the Covid-19 vaccine, yet the new strain has raised suspicions about the ability of the vaccine to deal with it. German Health Minister Jens Spahn said the vaccine is capable of preventing infections from the new mutation, but so far there are no guarantees for such claims and it has to be tested.

Even if the vaccine can prevent the transmission of the new strain, it will take a long time for the vaccine to be available for everyone around the world, which is propelling countries to impose tough restrictions in the meanwhile.

The new strain of COVID may have the same impact of the first corona wave, where the U.S. dollar could be the first choice for liquidity seekers, but any retreat in gold or stocks would make very appealing investments, especially for those who missed making profit during the first Covid-19 wave.