A new COVID-19 strain is sending stocks plunging, but here’s why investors shouldn’t panic, says this analyst

by Warrior2

A new $900 billion coronavirus stimulus deal has finally been struck — but U.S. stocks look set to tumble at the open.

Fears over a new strain of the coronavirus that causes COVID-19, discovered in the U.K., have spooked investors at the beginning of Christmas week. The U.K.’s health minister Matt Hancock warned that the new strain, said to be highly infectious, was “out of control” as the government scrapped a planned relaxation of the rules over the holiday period. Prime Minister Boris Johnson said the strain could be 70% more transmittable.

A number of European countries, including France, Italy and the Netherlands have suspended all travel to and from the U.K. Italy has also detected a patient with the new strain.

The developments have brought a return to uncertainty, hitting global stocks early on Monday. Despite the COVID-19 aid deal, Dow futures YM00, -1.42% fell 1.6%, or 490 points, ahead of the open, while the pan-European Stoxx 600 SXXP, -2.80% was 2.6% lower.

In our call of the day, Markets.com analyst Neil Wilson described the market move as near-term volatility and said “corrections of this nature” are to be expected on the road to full vaccine deployment.

“This is the kind of near-term volatility we can expect until the full force of vaccines is felt. There has been a lot of hope already priced in with the vaccine-inspired November rally so we cannot expect a straight line higher for stocks,” he said in a note on Monday.NOW PLAYING: Biden Introduces Picks for Climate and Energy Team

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He added that the rotation trade was unwinding, at least in the U.K., due to tighter measures and travel restrictions, with oil companies BP BP, -7.06% and Royal Dutch Shell RDSB, -6.83% and British Airways owner IAG IAG, -9.21% among the notable fallers, and online grocer Ocado OCDO, 5.12% and food-delivery company Just Eat Takeaway JET, 2.43% among the few European stocks rising.

With the full impact of the vaccine some months away, Wilson warned investors to be prepared for a rough ride. “The cavalry may be coming but the homesteaders need to batten down the hatches and face another onslaught before they arrive,” he said.

The markets

After closing 0.4%, or 124.32 points, lower on Friday, the Dow Jones Industrial Average DJIA, -0.41% was set to open lower on Monday despite the new coronavirus stimulus deal. Dow futures YM00, -1.42% slipped 1.6%, implying a 490-point loss at the open, while S&P 500 futures ES00, -1.60% fell 1.8%. The discovery of a new strain of coronavirus in the U.K. was to blame for the negativity, with European stocks hit hardest. The German DAX DAX, -3.09% fell 2.9% and the French CAC PX1, -3.07% dropped 2.6%. 

The pound GBPUSD, -1.60% tumbled 1.9% as a result of countries banning travel to the U.K. amid the new virus strain and a lack of progress in the Brexit trade deal talks. Sterling’s weakness mitigated losses for the internationally-exposed FTSE 100 UKX, -2.68%, which was 2.3% lower. Oil prices CL00, -3.90% BRN00, -3.88% fell sharply on concerns the new strain will hit demand.

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The chart

Our chart of the day from Fundstrat shows that the percentage of the U.S. with falling cases is at 38% — the highest level since early October, which its analysts said may suggest the third wave has peaked. But they added that the situation in California was “pretty serious.”

The buzz

Biotech Moderna MRNA, -2.62% began distributing its COVID-19 vaccine on Sunday, the second vaccine to be authorized in the U.S.

suggestive tweet by Tesla Chief Executive Elon Musk has led to a discussion about a potential ‘$1-trillion favor’ for Tesla shareholders.

Anglo-Dutch oil major Royal Dutch Shell RDSB, -6.83% said it expects to book charges of between $3.5 billion and $4.5 billion in the fourth quarter due to write-downs, asset restructuring and onerous contracts. The stock fell 3.7% in early trading.

Pharmaceutical company GlaxoSmithKline GSK, -1.11% said on Monday that the European Union has granted market authorization for ViiV Healthcare’s long-acting HIV treatment Vocabria.

New York Governor Andrew Cuomo called it “reprehensible” and “grossly negligent” to allow U.K. travelers to fly into JFK Airport without being tested despite a contagious new mutations of coronavirus shutting down London.

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