- European shares recover from Omicron scare
- Hard-hit travel stocks lead broad based bounce
- BT rallies on takeover interest chatter
- U.S. futures point to positive Wall Street open
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FOUR POSSIBLE OMICRON SCENARIOS (1302 GMT)
It will take days to several weeks for experts to evaluate the severity of the new Omicron coronavirus variant but in the meantime, Goldman Sachs economists have assessed four possible outcomes and their subsequent market impact.
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1. In a first “downside” scenario, Omicron transmits more quickly than Delta and also evades immunity against infections more, but evades immunity against hospitalizations only slightly more, and causes similarly severe disease, GS said.
In this scenario, global growth in Q1 slows to a 2% quarter-on-quarter annual rate, 2.5 percentage point below the current GS forecast, and growth in 2022 as a whole is 4.2%, 0.4 percentage point below current forecast.
2. In a second and less likely “severe downside” scenario, both disease severity and immunity against hospitalizations are substantially worse than for Delta. In this scenario, global growth is substantially lower than in the first downside scenario, while the inflation impact is again ambiguous.
3. In a third “false alarm” scenario, Omicron spreads less quickly than Delta, and has no significant effect on global growth and inflation.
4. In a fourth “upside” scenario, Omicron is slightly more transmissible but causes much less severe disease.
GS is not making Omicron-related changes to their forecasts until the likelihood of these scenarios (listed above) become somewhat clearer, economists led by Jan Hatzius wrote in a weekend note.
In a separate note, Citi Research strategists said market reactions to news of the omicron variation seemed relatively comparable to delta from an ETF perspective thus far.
Volumes in Risk transfer ETFs often used by tactical traders notably picked up during Friday’s session, comparable to the action when delta became a variant of concern.
However, ETF volumes compared to single stocks were near two-year highs on Friday, indicative of a lighter-than-usual trading session post the U.S. holiday.
Omicron hit energy and financials stocks the hardest while Delta damaged consumer most, Citi analysts noted, adding that the Delta drawdown in early May lasted about 5 days.
WAIT AND SEE (1110 GMT)
With European stock markets up about 1% as we move towards midday trading, it appears that Friday’s omicron scare has been somewhat digested.
The direction of travel from here couldn’t be murkier though and analysts are warning that we just need to wait for hard facts and see how dangerous that new variant really is.
“It’s a wait and see mood on the markets today”, wrote Susannah Streeter at Hargreaves Lansdown while many market watchers agree on one thing: expect some volatility ahead.
“Short-term volatility will likely be driven by the growth rate of overall cases, government mobility and travel measures, identification of the variant in different locations, and anecdotal observations around disease severity”, predicted Mark Haefele, CIO at UBS GWM.
For Jordan Rochester at Nomura, news on how omicron can escape vaccine will be key.
“We haven’t learnt much more as to what Omicron will mean for markets whilst we await the vaccine efficacy results (within two weeks)”, he wrote.
At AXA Investment Managers, chief economist Gilles Moëc believes it will indeed take “some weeks” for the key questions to be answered and whether we are heading towards hard lockdowns.
“While we wait for this, policymakers will have to be very cautious when making key decisions given the need to contemplate the possibility ‘hard’, growth-busting sanitary measures may have to be re-instated”, Gilles Moëc wrote.
Berenberg economist Holger Schmieding sees some short term bad news as likely as we move forward.
“The newsflow seems more likely to get worse than to get better in coming days”, he says, adding that in the grand scheme of things, there probably won’t be a case for a dramatic rerating of “the overall levels of equity prices”.
“We do not see Omicron as a reason for a sustained bear market”, he added.
STOXX EYES BEST DAY SINCE MID-OCTOBER (0853 GMT)
Investors look to have taken the view that downside attached to the Omicron variant has already been priced in and this morning they are back in buying mode, seeking to snap up bargains across European equity markets.
After diving 9% on Friday, battered travel stocks (.SXTP) are leading the way, up around 3%, even as authorities around the world restrict travel to curb the spread of the new variant. Oil (.SXEP) and tech (.SX7P) are also bid, both up around 2%.
Autos (.SXAP) are the only weak spot, penalised by a guidance cut at Faurecia, which sent shares in the French automotive supplier falling by more than 6% to two-month lows.
BT Group shares rallied on a reported takeover interest from Indian oil-to-telecoms conglomerate Reliance Industries.
The STOXX 600 was last up almost 1%, set for its best day since October 14 (.STOXX).
BUYING THE OMICRON DIP (0733 GMT)
Sell first, get answers later. With stocks near lifetime peaks, the Black Friday reaction to the new fast-spreading virus strain Omicron was hardly surprising.
But a weekend later, investors look heavily engaged in buying the dip, as markets take a more balanced view of risks attached to what the WHO called a “variant of concern”.
After their ninth biggest drop ever on Friday, gains in crude prices topped 5% earlier in Asia and stock futures point to a solid bounce across Europe and America.
A South African doctor said patients with Omicron have “very mild” symptoms and investment houses don’t look to have budged that much. Credit Suisse, for example, made no portfolio changes, staying slight overweight on equities.
Perhaps more telling is that retail traders poured north of $2 billion into U.S. stocks on Friday, setting the second biggest daily inflow on record, per Vanda Research data.
Of course there are uncertainties and that will likely make for volatile days heading into the Christmas shopping season.
Understanding the level of severity of the variant “will take days to several weeks”, said WHO. And vaccine maker BioNTech needs up to two weeks to figure out whether the shot it makes with Pfizer needs to be reworked. read more
So while Omicron has spread from Australia to the Netherlands and governments ban travel and mull lockdowns, markets may also gamble on central bankers turning more patient in their path towards rates normalisation.
Lots of speakers from the Federal Reserve and the European Central Bank are lined up for today. On Sunday, speaking about risks to the recovery, ECB’s Lagarde said: “We now know our enemy and what measures to take.”
Key developments that should provide more direction to markets on Monday:
- ECB speakers: Governor Lagarde, ECB board members Andrea Enria, Isabel Schnabel, Pentti Hakkarainen; ECB Vice President Luis de Guindos
- Euro zone consumer sentiment/inflation expectations
- German preliminary CPI/HICP
- Fed speakers: Chairman Jerome Powell, New York President John Williams, Governor Bowman
- Emerging markets: Kenya central bank meets; Turkey trade balance and bank NPL ratios
EUROPE: REBOUND MONDAY (0710 GMT)
After suffering their worst day in 17 months on Friday, European shares look set for a bounce, as investors take a more balanced view on risks linked to the new virus variant Omicron.
Futures on the Euro STOXX 50, DAX and FTSE indices were last rising between 1.2-1.5%, while derivatives on U.S. benchmarks also pointed to a positive start later on Wall Street.
Over in Asia, oil prices bounced more than $3 a barrel to recoup a chunk of Friday’s sell-off, and the MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) eased slightly, but found support ahead of its 2021 low. read more
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