Omicron variant and Fed chief deliver one-two punch to stocks

Global stock prices slumped on Tuesday, as fears about the potentially damaging economic effects of the Omicron coronavirus variant and hawkish comments from the chair of the US central bank swirled through markets.

The benchmark S&P 500 index fell 1.6 per cent, erasing gains on Monday and adding to the 2.3 per cent drop on Friday when concerns about the impact of the new variant first took hold. The tech-heavy Nasdaq Composite share gauge also dropped 1.6 per cent.

In prepared remarks on Monday Jay Powell, Federal Reserve chair, said that rising Covid-19 cases and the Omicron variant, “pose downside risks to employment and economic activity and increased uncertainty for inflation”.

This was amplified on Tuesday by the suggestion from Powell that the US central bank may be open to accelerating its monetary tightening programme to combat inflation.

His comments helped drive up shorter-dated Treasury yields, which move with interest rate expectations, while driving down longer-dated Treasury yields, which move with growth and inflation expectations. The difference between five- and 30-year Treasury yields narrowed by the most since March 2020.

Line chart of Performance (%) showing US stocks hit by Powell testimony and Omicron fears

The two-year Treasury yield, which is particularly sensitive to interest rate expectations, rose 0.04 percentage points to 0.52 per cent.

Earlier, Europe’s Stoxx 600 index closed down 0.9 per cent lower, following a choppy day of trading marked by worries about the new variant’s potential to evade vaccines. Hong Kong’s Hang Seng index and Tokyo’s Nikkei 225 both lost 1.6 per cent.

Stéphane Bancel, chief executive of vaccine maker Moderna, predicted in an interview with the Financial Times that existing vaccines would be much less effective at tackling Omicron than earlier strains of coronavirus. He also warned that pharmaceutical companies would take months to manufacture new variant-specific jabs at scale.

Crude oil prices dropped as the vaccine doubts sparked renewed concerns about a slowdown in global mobility and a hit to the recovery in oil demand. International marker Brent fell by 4.2 per cent to about $70.31 a barrel, while the price of West Texas Intermediate, the US oil benchmark, fell as low as $64.91, its lowest intra-day price since August.

Line chart showing Omicron variant knocks oil price

“The looming shadow of the Omicron Covid-19 variant is growing darker over global oil markets today, following concerning news regarding vaccine effectiveness from the CEO of Moderna,” said Louise Dickson, senior oil markets analyst at consultancy Rystad Energy, referring to the FT article.

“The threat to oil demand is genuine,” said Dickson, suggesting that another wave of lockdowns could result in the loss of 3m barrels a day of demand, or about 3 per cent of the global total, in the first quarter of 2022. She cited “telltale evidence” of a tightening of restrictions in countries such as Australia and Japan.

Oil market attention is now on the Opec+ meetings this week, where the producer group will decide whether to pause its plans to increase supply in the coming months in order to prop up an increasingly bearish market.

Investors expect markets to remain volatile as information emerges about Omicron and the capacity of governments and existing vaccines to contain it. Wall Street’s Vix index, a measure of expected stock market volatility, rose to 27 on Tuesday from 23 in the previous session — higher than its long-run average of 20.

Although the US has not detected any Omicron cases so far, President Joe Biden has predicted it will emerge in the country.

“The magnitude of market reactions may still increase if we start seeing cases of this variant in the US,” said Tancredi Cordero, founder and chief executive of investment advisory boutique Kuros Associates.


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