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Inventories drop amid fears COVID variants threaten economic recovery

From Wall Street to Sydney, stocks crash Monday amid rising fears COVID-19 infections means the pandemic is worsening in hot spots around the world.

The S&P 500 stock index fell 1.6% in the first half hour of trading, after hitting a record just a week ago. Another sign of concern, the yield on the 10-year Treasury fell to a level close to its lowest level in five months. It hit 1.21% as investors scrambled to find safer places to put their money.

The Dow Jones was down 626 points, or 1.8%, to 34,062 as of early Monday, while the high-tech Nasdaq composite was down 1.5%.

Airlines, hotels and the stocks of other companies that would be most affected by potential COVID-19 restrictions suffered the heaviest losses, recalling the early days of the pandemic in February and March 2020. Cruise line Carnival has fell 6.2%, and mall owner Simon Property Group lost 6.8%.

The drop also circled the world, with several European markets down more than 2%, amid concerns that new variants of the virus drag particularly hard on economies with low vaccination rates. The benchmark US crude price, meanwhile, fell more than 5% after OPEC and allies agreed on Sunday to possibly allow higher oil production this year.

Experts say Indonesia has become a new epicenter for the pandemic as epidemics worsen in Southeast Asia. Meanwhile, some athletes have tested positive for COVID at the Olympic Village in Tokyo, with the Games scheduled to open on Friday.

“The more transmissible delta variant delays the recovery of (Asia’s) economies and pushes them further into the doldrums,” said Venkateswaran Lavanya of Mizuho Bank in Singapore.

Delta variant hammers developing countries


Even though vaccination rates are higher in the United States and some other developed economies, the tightly connected global economy means shots anywhere can quickly affect others on the other side of the world.

In Japan, the world’s third-largest economy, vaccine deployment came later than in other developed countries and has stagnated of late. Japan has so far been totally dependent on imported vaccines, and only one in five Japanese have been fully vaccinated.

Financial markets have been showing signs of heightened concern for some time, but the US stock market has remained largely resilient. The S&P 500 has seen only two weeks of decline in the past eight.

The bond market, however, was louder in its warnings. The 10-year Treasury yield tends to move with expectations of economic growth and inflation, and it fell about 1.75% in March. It was 1.22% Monday morning, against 1.29% Friday night.

Analysts and professional investors say that a long list of reasons is potentially behind the sudden movements in the bond market, which is seen as more rational and sober than the stock market. But at the heart is the risk that the economy will have to slow down sharply from its current extremely high growth.

Delta variant fuels jump in COVID cases


Along with new variants of the coronavirus, other risks to the economy include dwindling pandemic relief efforts from the US government and a Federal Reserve which is expected to start cutting aid to markets later this year.

Concerns about a possible sharp slowdown were particularly hard on stocks whose earnings are most closely tied to economic strength. Small business stocks, for example, have been struggling since peaking in March.

The Russell 2000 index of small stocks fell 2.3% on Monday, beating the losses of their biggest rivals on Wall Street.

In Europe, the German DAX lost 2.7% and the French CAC 40 fell 2.6%. The FTSE 100 in London fell 2.3%.

In Asia, Japan’s Nikkei 225 lost 1.3%, Hong Kong’s Hang Seng fell 1.8%, South Korea’s Kospi lost 1%. Australian stocks fell 0.9%.

In Japan, the vaccine rollout came later than in other developed countries and has stagnated of late. Japan has so far been totally dependent on imported vaccines and only one in five Japanese have been fully vaccinated.

Japan’s benchmark Nikkei 225 fell 1.3% to close at 27,652.74. South Korea’s Kospi slipped 1.0% and Hong Kong’s Hang Seng fell 1.8%.

Investor attention is now turning to US corporate earnings. Most companies will publish their results this week and the following weeks. Hopes are high, with S&P 500 earnings expected to jump 64% year-over-year, according to FactSet.