Global equity markets are still vulnerable to outbreaks of bad news and pockets of slowing growth heading into the seasonal Santa rally. Despite growing confidence the omicron variant of COVID-19 will not be as dangerous as its predecessor, Delta.
While the risk of a complete derailment of the economic recovery has largely been taken off the table by investors. The many uncertainties surrounding the omicron variant and other risks like inflation could keep market in check through the final few weeks of 2021.
“It’s a case of vaccines over variants at the moment but given the still unanswered questions on efficacy of vaccines or the seriousness of illness omicron may inflict, this could easily change and we expect markets to remain unsettled until there is greater clarity in coming weeks.” said JP Morgan Asset Management global market strategist Kerry Craig.
“The new variant represents a downside risk to our core scenario. Rather than a meaningful change to it and we haven’t changed our view of steady global expansion and positioning towards risks assets.”
Investors returned from the weekend break, pouring money into the cyclical areas of the market which had been hit hardest since the omicron variant was discovered in South Africa.
President Joe Biden’s chief medical adviser Anthony Fauci said over the weekend the new variant didn’t appear as dangerous as delta.
“Thus far, it does not look like there’s a great degree of severity to it,” Dr Fauci said. “But we have really got to be careful before we make any determinations that it is less severe. Or it really doesn’t cause any severe illness, comparable to delta.”
The Dow Jones Industrial Average soared 1.9 percent on Monday. But still has yet to erase the losses from its omicron-sparked sell-off almost two weeks ago.
Morgan Stanley equity strategist Michael Wilson said it appeared unlikely to omicron variant would be as economically destructive as delta but said the market wasn’t out of the woods.
“We remain hopeful that this will prove to be just another wave of COVID that potentially leads to even greater immunity via vaccines and/or natural recovery from the disease,” he told clients on Monday.
“Furthermore, it appears unlikely that any new widespread lockdowns will be imposed on US soil. Which is the real risk to economic and business activity.”
Mr Wilson said the sell-off in the last few weeks had just as much to do with growing risks to the markets strong returns this year as it did with the new variant. “The severity of the sell-off in equity markets the day after Thanksgiving was not necessarily due to omicron,” said Mr Wilson.
“Instead, we think the new variant served as the trigger to end a speculative seasonal rally that was ignoring this seasonal wave along with a lot of other visible risks.
Some of those risks could become evident this week.
On Friday, the US will release its inflation report for November and economists are expecting an even larger figure than a month earlier. When consumer prices spiked by their sharpest level in more than three decades on an annual measure.
ANZ is expecting headline inflation to rise to 68 per cent. A figure which could cause the Federal Reserve to taper its assets purchases more aggressively and bring forward its plans to hike rates.
“In the coming days, inflation will be the bigger focus [than omicron] given the US data out this week and the potential for core rates of inflation to rise again ahead of what will be a key meeting of the US Fed,” said Mr Craig.
“We expect them to increase the pace of the taper and for more committee members to signal a lift-off in rates next year. If the significance of the omicron variant does fade from view. Rates and inflation are the key factors for investors to watch.”
Originally written by William McInnes – 7th December 2021 – see original article here at Australian Financial Review
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