Stockmarkets are trading on thin ice as Omicron variant spreads

The Omicron variant of Covid-19 is driving stockmarkets down, with travel and leisure stocks particularly badly hit.

The Omicron variant of Covid-19 is “a cause for concern, not a cause for panic”, according to US president Joe Biden. Markets disagree. The FTSE 100 tumbled by 3.6% last Friday, its worst day since June 2020. This week the index rounded out its worst month in over a year. Traders dusted off the old lockdown playbook, selling travel and leisure stocks and crowding into tech. The CBOE VIX volatility index, the US stockmarket’s “fear gauge”, recorded its biggest gain in ten months. 

Investors fly in the dark 

With little information about the new variant, traders began to overreact to any crumbs of news: markets rallied at the start of the week on anecdotal reports that Omicron only causes mild symptoms, only to retreat the following day after the boss of drug company Moderna suggested that existing vaccines may struggle against the new variant. Other vaccine makers struck a more upbeat tone. 

“It’s difficult for investors to figure out what moves to make when even the clever folk who make vaccines” seem to disagree, says Danni Hewson of AJ Bell. Answers to key questions – “will existing vaccines work? Will they need to be tweaked? How quickly can that happen?” – may not be known for a couple of weeks. 

The effect of bad news on markets is often cushioned by the expectation that central bankers will ride to the rescue. Sure enough, US bond markets have already begun to price in fewer interest-rate rises next year. Yet high inflation reduces the Fed’s room for manoeuvre, says John Authers on Bloomberg. Indeed, “further pandemic delays and stoppages” would probably “translate into higher goods inflation, already at its highest in four decades”. 

Buy the dip? 

It is easy to see what markets fear from Omicron, says Jim Armitage in The Sunday Times. “Travel bans will throw another monkey wrench into the global supply-chain machinery, pushing up inflation… lockdowns would hit jobs and confidence, doubtless triggering more splurges of public money”. But recent experience has taught traders that it is profitable to buy Covid-19 dips: the FTSE has risen by 35% since its March 2020 nadir. 

This time might be different, says Robert Armstrong in the Financial Times. Some fear that “the emergence of dangerous variants is a pattern set to repeat indefinitely”. Even if vaccine makers can tweak existing shots, they will always be one step behind the virus. “It felt for a moment there like we were in the late innings with Covid-19. What… if there is a collective realisation that we are in the middle innings at best?” 

Oil traders suffer Omicron chill

Oil has had its worst month since the pandemic began. Brent crude started November at $84 a barrel, but news of the Omicron variant of Covid-19 saw it crash by 18% in days to end the month around $70 a barrel. The fuel is still up 37% since the start of 2021, but the scale of the selloff reflects bets that global fuel demand could take a sizeable hit as governments once again tighten travel restrictions.  

Lockdowns last year cut global oil demand by more than 10%, says Caroline Bain of Capital Economics. The key question is how Opec+, a group of oil producers led by Saudi Arabia and Russia, responds. It had been gradually raising output to take advantage of recovering global demand. If Opec+ now opts to delay that process then tighter supply “should put a floor under prices”. Oil had been riding high prior to the Omicron news, says Ambrose Evans-Pritchard in The Daily Telegraph.

The White House had grown so concerned about near-record US petrol-pump prices that last week it released 50 million barrels from the US strategic petroleum reserve in a bid to cool things down. The ruse didn’t work: 50 million barrels is “barely 12 hours of global consumption”. Much bigger structural forces are at play: “Investment in [global] oil and gas exploration has collapsed from $900bn to $350bn a year since 2014”. With legacy fields in decline and renewables not ready to replace them, the resulting energy squeeze will only send prices higher.  

Omicron has sent a “shuddering chill through the nerves of oil traders”, says Jack Denton in Barron’s. But JP Morgan’s analysts are bullish. They think underinvestment in new capacity and the likelihood that Opec+ will pause further output increases next year could see Brent “overshoot to $125 a barrel in 2022 and hit $150 in 2023”.  

“It’s far too soon…to declare Omicron a nightmare variant” that portends another round of lockdowns, says Josh Nathan-Kazis in Barron’s. Current vaccines should continue to provide some protection against the new strain. Investors hate uncertainty, but it is “too early… to assume the worst”. The violence of the selloff shows that highly priced stockmarkets are in a precarious position, says Robin Wigglesworth in the Financial Times. “Investors have been blithely skating into the Christmas period… But the ice underneath may be thinner and brittler than many realise.” 

Recommended

Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

The Energy Price Guarantee will now be extended, but how much will your gas and electricity cost you in 2023?
9 Dec 2022
What is an annuity?
Glossary

What is an annuity?

Annuities are growing in popularity as rates increase. But what is an annuity, and how do you get one?
9 Dec 2022
Profit from patience
Advertisement Feature

Profit from patience

Smart investors will reap the rewards by staying focused on the long-term, research from Alliance Trust shows.
9 Dec 2022
National Grid gets ready to pay households to cut energy use this weekend
Personal finance

National Grid gets ready to pay households to cut energy use this weekend

The cold weather and unfavourable wind conditions have raised concerns about electricity supplies, prompting the National Grid to consider paying hous…
9 Dec 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
The pros and cons of smart meters – should you switch?
Personal finance

The pros and cons of smart meters – should you switch?

A smart meter can help you keep tabs on your energy usage, but is it better than a regular meter? We take a look at smart meters vs regular meters.
2 Dec 2022