The Omicron effect: What’s next for global stock markets?
By Indrabati Lahiri and Jenal Mehta
17:30, 1 December 2021
Global financial markets have been roiled in recent days as concerns about the spread of the new Covid-19 virus strain, known as Omicron, renews threats of economic disruptions across the world.
The UK’s FTSE 100 was higher Wednesday, rebounding from an seven-week intraday low Tuesday. The share index slumped 3.7% Friday, the biggest one-day decline since the first half of 2020. European and US indices also saw sharp setbacks since late last week but are higher Wednesday.
Travel bans
Travel-related stocks have taken a hit, with major airline names such as Southwest Airlines, Delta Air Lines and Ryanair all down since 26 November. The impact on pharmaceutical stocks has been mixed, with most seeing minimal effects on their prices. Vaccine maker Pfizer is an exception. The stock is up more than 6% over the past five days.
In Europe, the UK was the first country to ban travel to South Africa. This decision was criticised by the South African Government. EU member states have also halted flights to south Africa. EU Commission President Ursula von der Leyen on 26 November proposed a temporarily halt to travel from affected countries. Since then, many nations have imposed travel restriction on countries in southern Africa.
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WHO urges vaccinations
The World Health Organisation (WHO) is still unsure about whether Omicron causes more severe consequences than previous variants of Covid-19, although there does seem to be evidence of higher rates of infection.
The South African doctor who had first discovered the new strain has clarified that patients infected with the Omicron strain displayed “unusual but mild” symptoms despite a recent surge in cases in South Africa.
WHO continues to urge the larger population to get vaccinated as soon as possible, stressing that “it is vitally important that inequities in access to Covid-19 vaccines are urgently addressed.”
US Fed chair sees less impact with each wave
In the US, Federal Reserve chair Jerome Powell highlighted that each new wave or outbreak of Covid-19 seems to have less impact on the US economy than the last one, as investors become accustomed to dealing with uncertainty and short-term market falls, which in time could also reduce mass sell-offs.
In testimony before the US Senate, Powell also stated: “The recent rise in Covid-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation”. He added that worries about returning to the workplace in person may cause slowdowns in the labour market and complicate supply chain constraints.
JP Morgan: Effects will not be persistent
Analysts at JP Morgan expect diminishing effects from Omicron. From a public health perspective, the variant will be felt mostly by the immunocompromised and the unvaccinated.
As a result, consumer reaction is likely to be mixed. Some people have mentally moved on from the pandemic or have found ways to live differently.
Thus, most of the economy is expected to experience little disruption from this news. Travel and entertainment may see a light slowdown. The analysts expect the economy as a whole to continue its growth momentum into the new year.
Blackrock favours equities, but is ready to pull out at a moment’s notice
Blackrock analysts wrote in a report published on the company’s website that they still favour equities for the moment, but may change their position in case treatments and vaccines prove to be less effective than expected. If they deliver results, Omicron may only delay economic recovery.
The firm plans to “lean against any stock market pullbacks”, since less growth at the moment would mean more growth in the future.
Coming to how vaccine programmes and government restrictions can help curb the impact of the strain, BlackRock believes that “vaccine campaigns so far have proven effective and versatile. It would be a game changer if the new strain were to significantly compromise vaccine effectiveness and question the restart, but there is no evidence of this yet. Government restrictions will be lighter and more targeted than previous lockdowns, we believe, and their effect on economic activity has been waning as the world has adapted.”
When looking at yield rates and how they may interact with equities in this new situation, the investment manager highlights that the market is likely to continue dealing with negative real, or inflation adjusted yields, as real yields had increased ahead of Omicron but are still around record lows. This is likely due to a more subdued reaction to inflation, on the back of monetary and fiscal measures to control the pandemic and central banks putting off curbs on inflation. From here, real yields are expected to rise, but still stay at relatively low levels. This would have the effect of bolstering equity valuations, all while keeping nominal bonds and cash in check.
Oxford Economics believes that there is not enough evidence to assess Omicron yet
Economist Ben May, Director of Global Macro, wrote in a report published on the company’s website that it is much too early to assess what kind of economic and health effects Omicron may have.
He goes on to highlight: “If Omicron became the dominant strain and proves to cause less severe health outcomes than Delta, any near-term negative effects on the recovery could be quickly reversed and it could even reduce the scale of economic scarring in the medium term.”
About the effects of Omicron, in case it turns out to be more serious than anticipated, he adds, “If Omicron became the dominant strait and proves to cause less severe health outcomes than Delta, any near-term negative effects on the recovery could be quickly reversed and it could even reduce the scale of economic scarring in the medium term, then global gross domestic product growth next year could slow to 2.3%, well below our existing baseline forecast of 4.5%.”
Regarding whether more restrictions will be inflationary, he points out that in the short term, governments are likely to impose stricter restrictions on international travel, by making it more costly and cumbersome, which will in turn lower oil prices, leading to lower energy prices across the globe in the following months. The company is of the view that global inflation will reduce sharply in 2022.
Travel and leisure to be most affected, if at all
Analysts seem to agree that travel and leisure will be most affected industry, especially in light of the travel bans and potential lockdowns. Christopher Vecchio, Senior Strategist at DailyFX said: “It seems that the new variant is already having its impact to stunt the path of recovery in the broader economy and particularly for businesses dependent on travel as well as brick-and-mortar.”
He continues, “Lockdowns are generally a higher probability owing to a rise in new cases that was already showing through in major economies like Germany, the United Kingdom and the United States. There is a strong reluctance to re-shutter for many developed world economies given the difficulty of economic recovery and probability of subsequent waves of new variants that seem inevitable if the whole world does not vaccinate.”
Volatility is expected
The markets are expected to remain volatile until scientists discover the health effects of the new variant, giving rise to potential lockdown and travel bans.
Craig Erlam, Senior Market Analyst at OANDA says: “Omicron is sending shockwaves throughout global stock markets as investors scramble to find out more about the new variant and whether it poses a significant economic risk.”
He adds: “The old adage is that markets hate uncertainty and Omicron provides that in abundance. As the next couple of weeks pass and we get more information, anxiety should pass as long as the news isn’t too bad. Until then, we could continue to see significant volatility.”
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