Markets volatile amid Omicron variant concerns

Global shares traded lower last week, predominantly due to increased concerns over rising inflation and the recent renewed surge of coronavirus cases, notably in Europe. In addition to this, global equities and commodities, namely oil prices, were hit harshly, as the discovery of a new coronavirus variant: Omicron, sparked a widespread sell-off.

US and European stocks had bounced back on Monday, after last Friday’s rout as investors were re-assessing the likely damage caused by this new variant, with experts initially indicating that the new variant had been mild so far.

Rightly so, the consensus pool of analysts nevertheless predicted that markets would remain volatile, as investors were expected to await scientific evidence on the developments and additional information vis-à-vis the potential on the variant to alter the path of economic growth.

Indeed, Omicron has now spread to more than a dozen countries across the globe, prompting the possible re-introduction of new travel restrictions. Additionally, the World Health Organization (WHO) stated on Monday that the new virulent mutation posed a very high risk of infection, although WHO further added that it is still unclear how severe the new variant is.

Market sentiment changed abruptly however, in early trading on Tuesday, over comments from Moderna chief, Stephane Bancel, who suggested that the existing vaccines against COVID-19 might struggle to fight against this new variant.

While also predicting a material decline in the effectiveness of the respective vaccines, Bancel further stated that it might possibly take months until drug-maker companies can produce and manufacture the new variant specific jabs in sufficient quantities to be affective.

Concerns over the Omicron variant drove investors to move to safe government bonds, pushing the US 10-year treasury yield to 1.46% territory on Tuesday. Meanwhile, in the commodities space, brent crude oil, which is regarded as the international oil benchmark, also traded lower, hitting $71 a barrel (-3%), intraday Tuesday.

Positive sentiment, which had rallied on Monday ultimately reflecting a burst of optimism and possibly a buying opportunity, slumped on Tuesday.

Asian equities and oil prices rebounded on Wednesday after a punishing session on Tuesday which was specifically dominated by concerns over the Omicron coronavirus variant. The majority of the stock markets in Asia almost recovered the losses of the previous session, with Hong Kong’s Seng index rising 1.4% and Japan’s Topix up 0.7% respectively.

Similarly, future markets tracking the European and US indices all signalled gains this morning. For instance, as at the time of this writing, Europe’s Stoxx 600 index (+1%), Germany’s DAX (+1.2%) and France’s CAC 40 (+1%) all opened higher today. The FTSE 100 also opened higher following yesterday’s losses (+1.3%). Meanwhile, future markets tracking the S&P500 are currently up within the +1% region.

Ironically, the aforementioned shifts and rebounds in financial markets have been predominantly driven by comments from Federal Reserve (FED) chairman Jay Powell, who was been nominated for a second term last week. Despite the mounting concerns over economic growth which inevitably have been posed by the new Omicron variant, Powell hinted that he would support faster monetary tightening by the US central banks to combat the continued soaring inflation.

Yesterday’s initial reaction was negative as markets might have digested the more hawkish tone as a risk given the uncertainty brought about by the newly emerged variant. Nonetheless, we believe that the heightened volatility continues to be driven namely by retail liquidity, while fundamentals are been given less importance in an investor’s rationale. Despite the uncertainty, we believe that dips brought about by volatility should offer attractive entry points in strong robust names which will over the medium to long term emerge as winners.

This article was issued by Andrew Fenech, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.