Havens Rally as Market Fears Over Europe Lockdowns Resurface

(Bloomberg) --

The prospect of widespread Covid-19 lockdowns in Europe is casting a pall over markets again.

Traders piled into haven assets and pushed back their expectations for interest-rate hikes after Austria announced a nationwide lockdown starting on Monday. Germany’s health minister refused to rule out closures in the country, weighing on investor expectations for a post-pandemic recovery. 

Austria Imposes New Lockdown, Germany May Follow as Covid Rages

The Japanese yen outperformed Group-of-10 peers on Friday, while the euro tumbled to a fresh six-year low against the Swiss franc. A gauge of the dollar’s strength extended gains. In emerging markets, the Turkish lira reversed earlier gains and weakened beyond 11 per dollar, edging toward a record low.

U.K. government bonds were among the biggest gainers in debt markets, with 10-year gilt yields pulling back five basis points. German bonds also advanced, sending 10-year yields to their lowest since Sept. 22. The Stoxx Europe 600 Index sharply pared gains, while S&P futures erased their advance.

The darkening outlook is a reality check for the market, which had largely put behind the risk of Covid-19. Traders had been focusing instead on the economic recovery as vaccines proliferated and pandemic restrictions were lifted, piling pressure on central banks to act fast to tackle rising prices. 

“Markets are progressively realizing and acknowledging that the picture is worsening, especially across the eurozone,” said Roberto Mialich, G-10 FX strategist at UniCredit Bank AG. “Some profit taking and position paring had emerged yesterday, but today Covid-19 concerns are prevailing.”

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Money markets have now begun to row back on their expectations for policy tightening. Traders pushed back wagers on a rise in the European Central Bank’s interest rate further into 2023, betting on eight basis points of hikes in December 2022 from as much as 14 basis points on Tuesday. 

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