Risk Assets Drop on Omicron Threat as Santa Rally Melts Away

Risk assets are falling hard, following on from last week’s sell off as the omicron variant creates havoc across European and Asian economies.

Oil and other industrial commodities are falling too as anti-Covid measures threaten to hold back the economic recovery, or even throw it into reverse.

Gold is largely unchanged at $1,796.85 an ounce after improving 0.9% last week on safe haven buying.

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European, Asia US futures slide into the red

European indices are off from their session lows but still substantially in the red.

The Europe Stoxx 50 index is off 1% at 4115 and London’s FTSE 100 and Germany’s Dax are lower by 1% (7199) and 1.6% (15282) respectively.

Travel and leisure stocks are suffering. Names such as Tui, Wizz Air, British Airways parent IAG and Lufthansa have all sunk around 3%. Ryanair is down 1.5%

In the US, markets look likely to start the week deep in the red, not helped by the prospects of president Biden’s flagship infrastructure  spending programme bitting the dust. S&P 500 futures are losing 1.3%.

Japan’s Nikkei index slumped 2.3% and Hong Kong’s Hang Seng 1.9%. The Shanghai index was down 1% as buying on hopes of stimulus spending by the government in 2022 failed to maintain momentum in the face of the first omicron cases emerging in China.

Crude oil benchmarks are losing out. Brent is down 3.2% at $71.16 and WTI is losing 3.6%, falling to $68.30.

Covid restrictions hit Europe’s economy

Restrictions to slow the rapid spread of the omicron variant of the Covid virus are being stepped up in Europe.

The Netherlands on Sunday reintroduced a  nationwide lockdown. Bars and restaurants have been shuttered as well as the majority of non-essential outlets until the middle of January at the earliest.

UK travellers have been banned from much of continental Europe. The German government led the way by bringing in travel restrictions at the weekend.

In the UK the prime minister is thought to be preparing an emergency announcement as soon as today, which could bring in further measures to stop infection spreading at record rates. There are fears across Europe that health services could be overwhelmed.

Ireland has brought in an 8.00pm curfew for the hospitality industry.

Thin trading volumes over the holiday period could see the markets fall dramatically as the omicron situation continues to worsen, with the virus certain to take-off in the US over the next few days. New York is already reporting a surge in infection and an uptick in hospitalisations. New cases in the US are up 21% in the past two weeks and deaths 9%.

Moderna vaccine boosts antibodies against omicron

Nevertheless, the bad news on the omicron front may also have some silver linings Infections seem to lead to milder disease symptoms, although this may be more due to the vaccination programmes and natural immunity.

Also, the Pfizer and Moderna vaccines combined with boosters appear to provide a significant degree of protection. in particular a third does of the Moderna vaccine provides a significant boost to antibodies in results the company has described as “reassuring, according to Bloomberg.

The news overnight that Democratic senator Joe Manchin will not vote for the Biden administration’s $2 trillion Build Back Better bill has led Goldman Sachs to shave its forecasts for US economic growth.

Goldman reduced its GDP forecast for the US economy next year to 2% from 3% previously.

Manchin is worried that the fiscal stimulus could have the effect of stoking inflation which is already running at a near 40-year high. The combination of less stimulus and higher interest rates could prove fatal for the US economy growth prospect next year.

Too soon to write off equities bull market?

“If fiscal policy loses momentum as the [US Federal Reserve] tightens, the growth-inflation trade-off may get more difficult,” commented Kit Juckes, a strategist at French bank Société Générale.

The World Economic Forum has postponed its Davos gathering for the second consecutive year due to Covid infection fears.

But despite the gloom currently in the markets, many analysts are reluctant to write-off the equity market bull market.

In a note to clients UBS Global Wealth Management writes: “In our view, markets can look through omicron concerns, and the gradual pace of monetary tightening won’t bring the equity rally to an end.”