Delta Variant Strikes Global Economy... G2 Trembles Amid Recession

Signs of Delayed US-China Economic Recovery
Market Liquidity Shifts Toward Safe Assets
Stocks and Cryptocurrencies Plummet
Uncertainty Over Bank of Korea Rate Hike Amid Step 4 Social Distancing Increase

[Asia Economy New York=Correspondents Baek Jong-min, Kim Eun-byeol, Song Hwa-jung] Concerns over the spread of the COVID-19 Delta variant and delays in the global economic recovery are throwing the global financial markets into turmoil. As forecasts that both the U.S. and Chinese economies could simultaneously decline spread, prices of safe-haven assets such as U.S. and German government bonds and the Japanese yen surged sharply. Conversely, risk assets like stocks and cryptocurrencies plunged across the board. The Bank of Korea’s dilemma over the possibility of an early interest rate hike is expected to deepen further.

◇ "Delta Variant, the Greatest Threat to the Global Economy" = On the 8th (local time) in New York’s financial market, the yield on the U.S. 10-year Treasury note fell intraday to 1.25%. In March, it had risen to 1.78% amid concerns that inflation was surging as the economy recovered rapidly.

However, now concerns over an economic downturn are driving funds into safe-haven U.S. government bonds. The real yield on the U.S. 10-year Treasury, adjusted for inflation, dropped to -0.96%. The 30-year Treasury yield fell to 1.92%, dipping below 2% for the first time since February. U.S. and European stock markets also plunged simultaneously.

The three major New York indices?the Dow Jones Industrial Average (-0.75%), S&P 500 (-0.86%), and Nasdaq (-0.72%)?closed lower. The Stoxx 600 index, reflecting the overall European stock market, fell 1.7%. Cryptocurrencies also remained weak that day, with Bitcoin dropping 4.9%, and Ethereum and Dogecoin plunging by as much as 9%.

The global spread of the Delta variant is emerging as a risk factor that could delay the global economic recovery.

There are also forecasts that the U.S. and Chinese economies, which have led the global economic recovery, will perform worse than expected. The U.S. Department of Labor reported that last week’s initial jobless claims were 373,000, over 20,000 more than experts had predicted. Regarding China’s announcement of a reserve requirement ratio cut, Daiwa Securities evaluated this as a signal that China’s second-quarter gross domestic product (GDP) will fall short of expectations.

Mathias Cormann, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), said in an interview with U.S. economic broadcaster CNBC, "The resurgence of COVID-19 is one of the biggest threats to the global economic recovery," adding, "Risks are increasing due to variants resistant to existing vaccines." Cormann’s warning is interpreted as meaning that the recent surge in the Delta variant and signs of a COVID-19 resurgence could affect the optimistic economic growth forecasts issued by various countries.

◇ Delta Variant as a Trigger... "Correction Inevitable" = Experts analyze that the recent record highs and increased burdens, combined with the full-scale fourth wave of COVID-19 including the Delta variant, have stimulated profit-taking desires. Kim Ji-san, Head of Kiwoom Securities Research Center, said, "With indices hitting new highs, the Delta variant is stimulating profit-taking desires," adding, "Until the spread of the Delta variant subsides, a period of correction should be considered."

Yoon Ji-ho, Head of Ebest Investment & Securities Research Center, also said, "Although it is currently impossible to present an expected band, further declines are expected," analyzing, "The explosive increase in the Delta variant acted as a trigger amid concerns over excessive bubbles relative to valuations."

A short-term correction appears inevitable. Yoo Jong-woo, Head of Korea Investment & Securities Research Center, said, "With the spread of the Delta variant and strengthened quarantine measures, economic momentum is expected to weaken significantly, so the possibility of a short-term correction should be kept in mind," adding, "We will maintain a neutral view for the time being."

◇ Interest Rate Hikes Moving Further Away? = With red flags raised over U.S. employment and inflation increases, analyses suggest that the Federal Reserve’s possibility of an early interest rate hike is decreasing. The rapid increase in domestic COVID-19 cases may also affect the Bank of Korea’s interest rate hike timetable. If the strengthening of social distancing measures delays the economic recovery, the Bank of Korea may adjust the pace of monetary policy normalization.

Initially, the market widely expected the Bank of Korea to implement its first rate hike as early as August or as late as October. However, with the social distancing level raised, there is a growing possibility that rate hike minority opinions will emerge after observing the impact on economic indicators such as private consumption.

Gong Dong-rak, economist at Daishin Securities, said, "The escalation of social distancing levels will have some impact on the interest rate hike schedule," adding, "If it becomes clear through indicators that economic activity has contracted due to the level 4 escalation and various indicators worsen, it will be very burdensome for the Bank of Korea to proceed with the next steps."

This content was produced with the assistance of AI translation services.