Asia Fears Summer of Virus as Stocks Sell Off on Delta Concern

(Bloomberg) -- The spread of the highly-contagious Delta variant continued to weigh on risk assets Monday with Asian markets in the crosshairs as the region struggles with worsening outbreaks amid a slow vaccine rollout.

The regional stock benchmark dropped as much as 1.4% with bourses in Southeast Asia leading declines. The main Philippine gauge fell the most since March after the country reported its first local cases of the variant on Friday, while Vietnam’s VN Index is on track to fall into a technical correction on fresh restrictions.

“Risk sentiment toward Asian asset markets remain poor, due to the worsening Covid-19 situation particularly in Southeast Asia,” said Khoon Goh, head of Asia research in Singapore at Australia & New Zealand Banking Group Ltd. “Tighter restrictions being imposed to curb infections will hold back the economic recovery, and we will likely be seeing downward revisions to 2021 GDP growth for some economies.”

The momentum of Southeast Asia’s outbreak has now eclipsed hard-hit locations like Latin America and India, with cases jumping 41% last week to more than a half-million and a regional vaccination rate of just 9%. Meanwhile, Asia Pacific’s developed economies from Australia to Singapore are implementing harsher mobility restrictions in a bid to stop the variant’s spread.

The MSCI Asia Pacific is lagging its U.S. and European peers this year with a gain of just over 1%. The MSCI Asean Index has fared worse, slumping 6% so far in 2021.

Asian currencies have also taken a hit, with the Bloomberg JPMorgan Asia Dollar Index down 1.6% for the year. The Philippine peso has slumped more than 3% this quarter. Investors have piled into the yen, a traditional haven.

Progress on vaccination and gauging the peak in infection numbers are key to turning investor sentiment around, according to Goh.

More Lockdowns

Speculation that lockdowns will be extended in Australia’s biggest cities sent the S&P/ASX 200 as much as 1.4% lower Monday and the nation’s bonds climbed alongside global peers as investors sought havens. The bond rally sent Aussie 10-year yields down as much as six basis points below their U.S. peers, the widest discount since November.

The Reserve Bank of Australia may end up reversing a decision to begin tapering its bond buying as a result of the prolonged lockdown in Sydney, the nation’s most populous city, according to Gareth Aird, an economist at the Commonwealth Bank of Australia.

Elsewhere, Singapore posted its highest number of new coronavirus cases in around 11 months, as clusters emerged from karaoke lounges and food centers. The Straits Times Index is on track for its third consecutive month of losses in July.

In Japan, two athletes tested positive for Covid-19 at the Tokyo Olympic Village, with 55 positive cases so far tied to the Games. The benchmark Topix Index fell for a fourth consecutive session.

“Asia macro continues to face multiple drags -- from the stop-start nature of restrictions forced by recurring waves and newer Covid variants, from the lack of policy space - both monetary and fiscal - to support growth and from the increasingly asymmetric nature of risks related to China,” wrote Deutsche Bank AG strategists including Sameer Goel in a recent note.

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