The South African rand sank to its lowest since October 2020, government bond yields briefly hit 10% and stocks shed more than 2% after the discovery of a Covid-19 variant described as the most concerning yet sent investors scrambling for safety.
The stock declines were led by sharp falls in hospitality shares, as Britain and some other countries banned flights from South Africa and its neighbouring countries, and placed restrictions on their citizens travelling there.
South African scientists said they had detected a new variant that had a “very unusual constellation” of mutations, which were concerning because they could help it evade the body’s immune response and make it more transmissible.
“This is devastating for the tourism sector which was hoping for a bumper December as borders had opened up. We expect that a wave of cancellations from travellers from the UK will be received over the next day or two,” said Lloyd Miller, research analyst at ETM Analytics in South Africa.
“Granted this is not just a local issue, emerging markets are selling off hard in the Asian session but the news does render the rand and by extension other regional FX pairs more vulnerable as a result,” Miller added.
News of the variant triggered a wave of selling of risk assets in both emerging and developed markets. Traders sought assets deemed safer such as U.S. and euro zone government bonds and the Japanese yen.
The rand dropped to as low as 16.368 against the dollar — levels last seen before the news of vaccine breakthroughs in November 2020. The rand was last at 16.13, down 1% on the session.
In fixed income, the yield on the local benchmark 2030 government bond jumped above 10%, its highest since early May 2020. The yields later retreated back to 9.9%, up 18 basis points.
The country’s dollar-denominated bonds also came under pressure with the 2041 issue dropping 2.3 cents to trade at 100.274 cents, Tradweb data showed. Five-year credit default swaps — the cost of insuring the country’s bonds against default — rose 21 basis points from Thursday’s close to 244 bps, data from IHS Markit showed.
Shares suffered with both the Top-40 index and the broader all-share sinking more than 2%.
Leading the losses was City Lodge Hotels, down more than 20% at one point before recovering to trade 15% lower.
Shares in Sun International, the owner of casinos and hotels including the Sun City Resort, fell as much as 14% while Tsogo Sun Hotels tumbled 11%.
The news out of South Africa hit broader emerging markets. The MSCI emerging markets equity index weakened 2.1% while the MSCI EM FX index dropped 0.3%, putting it on track for its worst day since August.