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Aussie stocks sank to their lowest in a week as creeping Covid uncertainty gripped financial markets.

The S&P/ASX 200 shed as much as 95 points before trimming its loss to 62 points or 0.85 per cent mid-session.

Declines in the heavyweight banks and miners outweighed gains in CSL, Afterpay and Wesfarmers.

What’s driving the market

A broad sell-off pulled cyclical sectors lower following losses on Wall Street on Friday and negative leads this morning from US futures. The defensive healthcare and utilities sectors provided havens after a new mood of caution took hold of global markets.

US and European stocks retreated on Friday as a resurgence in Covid-19 cases raised questions about the outlook for consumer demand. The S&P 500 dropped 0.75 per cent. S&P 500 futures fell 19 points or 0.43 per cent this morning, suggesting further weakness tonight.

“The cautiousness in the air can [partly] be attributed to covid developments,” NAB currency strategist Rodrigo Catril said.

“US cases of COVID-19 are up 70% over the previous week and deaths are up 26%, with outbreaks occurring in parts of the country with low vaccination rates,” he added. “New cases were surging in the UK, with the daily rate surpassing 50,000 – the highest in six months – and ahead of the lifting of final restrictions from today, so-called Freedom Day.

Markets are looking at these dynamics wondering whether the consumer will remain (UK) or turn cautious (US), particularly in countries where reopening strategies look set to continue in spite of the increase in infection rates.

Victorian Premier Dan Andrews announced the state’s lockdown will not lift tomorrow night, as originally scheduled. The state this morning reported 12 new cases.

New South Wales tightened restrictions in Greater Sydney over the weekend in a bid to get on top of an outbreak that has yet to show signs of coming under control. State health authorities announced 98 new local cases in the 24 hours to 8pm last night.

The ongoing lockdowns threaten to send economic growth into reverse, according to David Bassanese, Chief Economist at BetaShares.

“My estimates suggest lockdowns of both cities [Sydney and Melbourne] cost around 0.25% off national GDP for every week they continue (0.125% in NSW and 0.1% for Victoria), so a four-week lockdown in NSW and two weeks in Victoria (a likely best case scenario) would cost 0.7% off quarterly GDP or $3.7 billion – which would virtually wipe out most growth in the quarter,” Mr Bassanese said.

“An eight-week NSW lockdown and four-week lockdown in Victoria (a worst case scenario?) would slice 1.4% off GDP, or $7.5 billion, which would imply negative growth in the quarter.”

Going up

Healthcare companies with significant US earnings provided a haven as strength in the US dollar pushed the local currency below 74 US cents. Sleep apnoea specialist ResMed climbed 1.81 per cent to a new record. CSL rallied 2.36 per cent, Sonic Healthcare 1.84 per cent, Ansell 1.64 per cent and Cochlear 0.92 per cent.

A sharp decline in long-term bond yields offered support to select tech stocks. The yield on ten-year government bonds dived more than five basis points this morning to 1.24 per cent. Xero put on 1.84 per cent, EML Payments 1.7 per cent and Afterpay 1.4 per cent.

At the pointy end of the market, Brambles edged up 1.46 per cent, Wesfarmers 0.71 per cent and Coles 0.41 per cent.

An offtake deal with the world’s largest lithium-ion car battery maker lifted Vulcan Energy 0.75 per cent. LG Energy Solution will purchase 5,000 metric tonnes of battery grade lithium hydroxide from Vulcan in the first year and double that quantity in successive years of a five-year deal.

Buy now pay later group humm rallied 7.4 per cent on news of a 57.3 per cent lift in transaction volumes last quarter to $774.9 million.

Going down

Cyclical stocks sold off overseas on Friday night as investors bet economic growth will cool in the face of rising Covid numbers. Here, the materials sector retreated 2.2 per cent from Friday’s all-time high.

BHP eased 2.66 per cent ahead of tomorrow’s quarterly production update. Rio Tinto shed 2.24 per cent, Newcrest 1.41 per cent and Fortescue Metals 0.85 per cent.

The banks’ prospects for increasing lending margins continued to fade with bond yields (see above). NAB slipped 1.5 per cent, Westpac 1.36 per cent, CBA 0.97 per cent and ANZ 1.2 per cent.

The energy sector tracked a decline in crude prices after the OPEC+ oil cartel reached a deal to lift production caps. Brent crude dropped $1.10 or 1.5 per cent this morning to US$72.48 a barrel.

Woodside Petroleum gave up 2.15 per cent, Santos 2.35 per cent and Beach Energy 0.58 per cent. Oil Search declined 3.36 per cent on news Managing Director Keiran Wulff had resigned for health reasons following complaints about his behaviour.

Altium dived more than ten per cent before trimming its fall to 1.81 per cent. This morning’s turmoil followed news US giant Autodesk had abandoned its attempt to buy the Australian software maker. Autodesk confirmed acquisition talks had ended after Altium rejected a $5 billion offer.

Telstra eased 0.27 per cent after confirming media reports the company is negotiating to buy South Pacific telco Digicel Pacific in partnership with the commonwealth government. Digicel provides communication services across PNG, Fiji, Nauru, Samoa, Tonga and Vanuatu. Telstra said there was no certainty a transaction would proceed.

Gold miner Evolution sank 9.06 per cent as several brokers downgraded ratings and price targets in the wake of Friday’s disappointing production update.

Other markets

Asian markets logged solid declines. The Asia Dow shed 1.57 per cent, China’s Shanghai Composite 0.75 per cent, Hong Kong’s Hang Seng 2.06 per cent and Japan’s Nikkei 1.68 per cent.

Gold drifted $1.20 or 0.07 per cent to US$1,813.80 an ounce.

The dollar faded 0.16 per cent to 73.77 US cents as a classic “flight to safety” boosted the greenback.

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