A resurgent trend of COVID-19 worldwide is contributing to concerns over the transmission of the virus while the Delta variant is spreading throughout the globe. While Southeast Asian countries are grappling with the outbreak, new cases in Japan and South Korea are also surging, showing the risk that it might get out of control. The United States, with its high level of vaccination, has also seen an increase of new cases, with more than 120,000 cases registered in a single day on August 3. The same is true in Europe. The United Kingdom, which has eased its COVID-19 restrictions, saw 21,691 confirmed cases on August 3, while France added 26,829 confirmed cases. The ominous Delta variant means that investors and policymakers are concerned about a repeat of last year's panic and whether such a development will trigger a new financial market crisis.

However, as of now, the surge has not caused major fluctuations in global capital markets. In terms of global stock markets, following a minor shock on Monday (August 2), U.S. and European stocks rose to various degrees on August 3, indicating that the pandemic has caused few worries and concerns.

Meanwhile in China, after the intensified policy supervision, market sentiment has also recovered, bringing a rebound in the A-share market. After the panic last year, investors have already anticipated and assessed the uncertainty caused by the pandemic. In an environment of abundant liquidity, although the general belief is that COVID-19 will slow the recovery of the global economy, the stock market is not fretting in the short term over the impact of the pandemic that has largely been digested. That said, the trend of U.S. stocks rising and falling back on Tuesday reflects a lack of motivation for the market in the later stage. However, even with easing policies globally, the future stock market will face more and more obstacles.

According to the most recent data from the United States, manufacturing growth slowed for the second month in a row in July. The continuous spread of COVID-19 has indeed caused a lot of worries about economic growth. Nonetheless, market institutions believe that investors are not concerned about broader macroeconomic data, even if they show signs of slowing down. At the same time, since last year, the excellent performance of large listed companies has also kept investors confident in the prospects of the market. Yet, the real concern is that the spread of the Delta variant could pose severe risks for the suspension of economic reopening. The economic restrictions have had a huge impact on enterprises and capital markets and for this reason, governments in Europe and the United States are generally reluctant to continue with such measures.

While the pandemic has not yet brought a systemic impact on the stock market it had a direct impact on the commodity and fixed-income markets, reflecting concerns about future economic trends. Due to the decline in oil demand brought about by the global economic slowdown, international oil prices have declined for many consecutive days. On August 3, the price of light crude oil futures for September delivery on the New York Mercantile Exchange fell again by nearly 1%; the price of London Brent crude oil futures also fell by 0.66%. In the bond market, the prospects for economic recovery saw some setbacks. The real interest rate of the 10-year U.S. Treasury bond has gradually fallen from -0.7% to -1.127%, a record low. Inflation expectations have also ushered in an inflexion point, falling from about 2.5% to about 2.3%, which means that the probability that U.S. liquidity will continue to remain loose has increased. The decline in interest rates in the bond market happens in other countries as well. On August 4, the yield on Japanese 10-year Treasury bonds fell to zero for the first time since December last year, reflecting the growth in demand for Japanese Treasury bonds, which is rooted in investors' perception of the need for hedging because of the Delta variant. Meanwhile, the number of new confirmed COVID-19 cases in Japan on August 3 once again exceeded 12,000, and as panic continues to roll in, a large amount of funds is pouring into safe-haven assets again. The same is true in Europe. The share of negative-yield bonds now traded in the market, which includes sovereign and credit bonds, has hit an all-time high, reflecting the capital market's hedging needs. This is the result of uncertain factors brought about by the pandemic.

Investors' current risk aversion and wait-and-see attitude are ultimately derived from changes in global monetary policy led by the Federal Reserve, and this appears to be the biggest uncertain factor at present. While the pandemic influences global economic recovery, whether the Fed maintains its current easing attitude or begins to withdraw easing owing to changes in inflation, all of these factors will impact financial markets that are more reliant on liquidity assistance significantly.

With global economic recovery impacted by the pandemic, whether the Fed will continue to adhere to its current easing stance or initiate measures to withdraw from easing due to changes in inflation will critically impact capital markets that are relying on liquidity support.

While the current pandemic situation has affected economic demand and restrained the rise in commodity prices, it will also continue to put greater pressure on the global supply chain and shipping system, thus indicating that the imbalance between supply and demand may not be eased. This also shows that although the market expects economic growth to face a decline, the level of inflation will not fall further in the short term. The global central banks may face the dilemma if they should continue to conduct mass easing to stimulate the increase in inflation or not, to avoid economic and financial imbalances caused by stagflation. Moreover, after experiencing unprecedented easing, whether it is the Fed or other major central banks, monetary policy space will face some difficulties, and further easing will bring the world into a negative interest rate environment and plunge the capital market into uncharted territory.

Final analysis conclusion:

Although the current COVID-19 outbreak will not have a new impact on the capital market in the short term, its long-term spread will still aggravate economic and financial distortions and imbalances, which in turn will further accumulate systemic risk factors.