GLOBAL MARKETS-Stocks lurch lower, bonds jump as virus variant spooks investors

BY Reuters | TREASURY | 11/25/21 11:46 PM EST

* MSCI AxJ drops 1.8%; S&P 500 futures down 1%

* U.S. crude falls 2.5%

* Bond rally drives 10-year Treasury yield down 8 bps

By Tom Westbrook

SYDNEY, Nov 26 (Reuters) - Stocks suffered their sharpest drop in three months in Asia on Friday and oil tumbled after the detection of a new and possibly vaccine-resistant coronavirus variant sent investors scurrying toward the safety of bonds, the yen and the dollar.

MSCI's index of Asia shares outside Japan fell 1.8%, its sharpest drop since August. Casino and beverage shares sold off in Hong Kong, travel stocks dropped in Sydney and Tokyo. Japan's Nikkei skidded 3% and U.S. crude oil futures fell 2.7% amid fresh demand fears.

S&P 500 futures were last down 1% and Euro STOXX 50 futures down 2%.

Little is known of the variant, detected in South Africa, Botswana and Hong Kong, but scientists said it has an unusual combination of mutations and may be able to evade immune responses or make it more transmissible.

British authorities think it is the most significant variant to date, worry it could resist vaccines and have hurried to impose travel restrictions.

"You shoot first and ask questions later when this sort of news erupts," said Ray Attrill, head of FX strategy at National Australia Bank in Sydney, as the news rattled currency traders.

Bets on rate hikes also retreated as Fed funds futures rallied and two-year Treasury yields fell 6 basis points, the sharpest drop since March 2020.

South Africa's rand dropped more than 1% to a one-year low on Friday and the risk-sensitive Australian and New Zealand dollars fell to three-month trough.

Japan and Australia each hinted at possible border closures in response to the new variant.

"Markets are anticipating the risk here of another global wave of infections if vaccines are ineffective," said Moh Siong Sim, a currency analyst at the Bank of Singapore.

"Reopening hopes could be dashed."

Equity selling in Asia has global shares, on course for their worst week since early October. Dow Jones futures fell 1%, while FTSE futures fell 1.9%.

Moves in Treasuries were also sharp at the longer end, with 10-year Treasury yields down eight bps to 1.5618% and 30-year yields down 7 bps to 1.8963%.

Though that leaves yields inside recent ranges, heat has come out of wagers on the pace of rate hikes and the December 2022 Fed funds futures contract was last up 9 bps.

The yen jumped about 0.6% to 114.67 per dollar and the Aussie was last down 0.6% at $0.7141. The euro edged up 0.1% to $1.1221, as safety rather than policy differentials drove trade in Asia.

The moves come against an already growing backdrop of concern about COVID-19 outbreaks driving restrictions on movement and activity in Europe and beyond.

European countries expanded COVID-19 booster vaccinations and tightened curbs overnight. Slovakia announced a two-week lockdown, the Czech government will shut bars early and Germany crossed the threshold of 100,000 COVID-19-related deaths.

Shanghai on Friday limited tourism activities and a nearby city cut public transport as China doubles down on its zero-tolerance approach that is also unnerving traders.

(Reporting by Tom Westbrook; Editing by Lincoln Feast.)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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