Exposure rates of the Dorval Asset Management Range – 23rd July 2021

Wall Street faltered only slightly, but stress from the Delta variant seeped through to the financial markets nonetheless. The ongoing relatively moderate pace of hospitalizations in the United Kingdom – despite soaring Covid-19 case numbers – curbs fears of future restrictions on economic activity, at least for now. Additionally, vaccination programs are gathering speed and scope worldwide.

Despite drawdown of only 3.5% on the S&P500 between July 13 and 19, the world financial markets have undergone a period of significant stress. Volatility has increased, investors have taken refuge in US Treasuries and the dollar, and credit spreads have widened slightly. The CNNMoney Fear & Greed index reflects these dynamics and has plunged again, hitting its lowest since April 2020 (cf. chart 1).


CNNMoney Fear & Greed index for the US market


This uptick in risk aversion perhaps marks the peak of a long period of investors unwinding positions in favor of the most cyclical assets, which kicked off in March. Uncertainty surrounding the Delta variant is probably the driver for this trend, with investors fearing that western economies will renege on moves to reopen on the one hand, and concerned about deepening pressure on Asian economies on the other.


For the moment, the UK situation acts as a litmus test for other countries that have made sound progress on inoculation programs, and suggests that high vaccination rates break the link between the number of Covid-19 infections and the pace of hospitalizations (cf. chart 2). We cannot yet assume that this will be enough to avoid a fresh partial lockdown in the Fall in the northern hemisphere, but it is encouraging.


Stress test for Delta variant in the UK
New cases and new hospitalizations in the UK on a rolling 7-day basis

New cases (LHS) / New hospitalizations (RHS)


Meanwhile in Asia and Latin America, Covid cases are rocketing due to the Delta variant and countries have been scrambling to vaccinate over the past several weeks (cf. chart 3, this does not include Chinese figures, but vaccination rates there are now very high). Most countries outside the West should post vaccination rates relatively on a par with Europe by the Fall. However, vaccines used are less effective than in the West on average, particularly Sinovac, which has proven to be fairly disappointing and could fuel difficulties, as witnessed in Chile in the Spring.


Vaccination now more widespread
% of population that has received at least one shot

United Kingdom / United States / EU / Brazil / Japan / Australia / India / Indonesia

Uncertainties driven by the Delta variant could continue to hamper investor confidence, but the potential economic fallout from a negative turn in the pandemic remains reasonable. The overall principle is that the virus’ grip on the world economy is weakening, the effects last for a shorter length of time, and only severely impact some very specific sectors, such as international tourism. We remain watchful and maintain our moderate risk exposure, but at this stage, we see no cause to significantly adjust our portfolios as the markets have already priced in a substantial portion of cyclical risks.


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