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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.”
-
Meta’s AI splurge rattles investors
Meta's decision to join the AI race is driving investors away
By Dr Matthew Partridge Published
-
Is it a good time to invest in the UK?
Temple Bar Investment Trust is a diversified bet on British equities and looks excellent value, says Max King
By Max King Published
-
Meta’s AI splurge rattles investors
Meta's decision to join the AI race is driving investors away
By Dr Matthew Partridge Published
-
Is it a good time to invest in the UK?
Temple Bar Investment Trust is a diversified bet on British equities and looks excellent value, says Max King
By Max King Published
-
Top-quality, rapidly growing European stocks are selling at enticing valuations
Timothy Lewis, portfolio manager at JPMorgan European Growth & Income tells us where he’d put his money
By Timothy Lewis Published
-
Should you sell in May this year?
The market adage looks unlikely to apply in 2024, and global equities are proving resilient. Should you sell in May?
By Max King Published
-
AstraZeneca CEO’s £1.8mn pay rise approved despite shareholder opposition
AstraZeneca hiked its dividend to persuade shareholders to accept CEO Pascal Soriot’s pay rise. Is he worth his salary?
By Dr Matthew Partridge Published
-
Adidas, Nike or Jordans - could collectable trainers make you rich?
The right pair of trainers can fetch six figures. Here's how you can start collecting vintage Adidas, Nike or Jordans now
By Chris Carter Published
-
The industry at the heart of global technology
The semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
By Rupert Hargreaves Published
-
Three emerging Asian markets to invest in
Professional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
By Chetan Sehgal Published