Hot on the heels of the Delta variant, a new COVID-19 variant named Omicron – discovered over the last week – has thrown the markets into another tailspin. The long and short of the Omicron variant, based on early data, is that it seems more infectious than previous variants, but less dangerous.
Key themes for the week include:
- Omicron: the Christmas Grinch
- US jobless claims impress
- Markets find their feet following initial Omicron shock
- Oil futures tumble below $70
A SPANNER IN THE WORKS
The discovery of the Omicron variant was reported on the 26th of November. Here is what we know about the new variant on a preliminary basis:
- The variant was first sequenced in South Africa but has been spotted in many parts of the world
- Omicron has many mutations and appears to infect younger people more easily
- The rate of infections suggests this variant is highly transmissible
- Early signs, however, suggest symptoms of the variant are less severe
The misunderstanding around the origins of Omicron led to a knee-jerk reaction from a number of nations, which saw them place South Africa on their respective ‘red lists’; effectively banning travel to and from South Africa.
The market’s response to Omicron overlapped with the United States (US) Federal Reserve (Fed) Chair, Jerome Powell, and US Treasury Secretary, Janet Yellen’s testimony, in the US Senate, during which they warned of sticky inflation if Omicron put additional strain on supply chain shortages and bottlenecks. Another key consideration, predicated on how Omicron unfolds, is whether the hawkish momentum in developed-market central bank policy will maintain its course. As it stands, the Fed is still expected to hike interest rates either once or twice in 2022.
From a vaccine development perspective, Pfizer’s Chief Executive Officer (CEO), Albert Bourla, said they could have a vaccine targeting Omicron in less than 100 days, based on the speed at which their Beta and Delta variant vaccines were developed. In an interview with the Financial Times, Moderna’s CEO, Stéphane Bancel, cautioned that existing vaccines would struggle against Omicron. Moderna claims a 60-to-90-day vaccine development turnaround time and is already testing three existing boosters against Omicron, while developing an Omicron-specific booster candidate.
DATA IN A NUTSHELL
US jobless claims rose by 28 000 to 222 000, less than the market expectation of 240 000. The job report signifies an increasingly tight labour market, with workers leaving their positions for new jobs at the highest level on record and with hiring persisting at a brisk pace. In addition to the initial claims number, continuing claims fell by another 107 000, coming in below the two-million level for the first time since the early days of the pandemic.
In the eurozone, producer prices increased by more than expected in October, as prices at factory gates in that region rose 5.4% over the previous month for a 21.9% year-on-year gain. The market was expecting a 3.5% monthly rise and a 19% annual gain, but the surge in energy prices, 16.8% over the month and 62.5% over the year, drove the strong increases. Headline consumer inflation in November hit 4.9%, the highest level in the 25 years since the figure has been compiled, up from a 4.1% a month earlier and well ahead of the 4.5% expected by the market.
South African vehicle exports continued their downward trajectory, falling 42.2% in November compared to the previous year. The downward trend is linked to COVID-19 supply chains disrupting vehicle production and exports. A severe fourth wave in Europe, which is a key export market, is also weighing down on export sales. In contrast, domestic new vehicle sales lifted slightly by 6.6% year-on-year to 39 015 vehicles sold in November.
EQUITY MARKETS LOWER OVER CONCERNS OF NEW VARIANT
US stock futures rose early on Thursday, suggesting that markets were set for another volatile day, driven by uncertainty regarding the potential impact of the Omicron variant. Markets have bounced back and forth this week. The S&P 500 fell 1.2% and the Nasdaq Composite declined 1.8% on Wednesday as news of the first confirmed case of the Omicron variant in the US prompted a late sell-off. Both stock indices were down for the week with the S&P 500 giving back 3.1% and the Nasdaq Composite losing 3.4% thus far.
In Hong Kong, the Hang Seng Index slid to its lowest level since October last year, as China’s regulatory crackdowns combined with investor concerns around the Omicron variant and possible further lockdowns weighed down on many stocks. The index fell 7.5% in November, alone, and has lost close to a fifth of its value over the past six months. The index recovered somewhat to end the week flat at -0.3%, with the Shanghai composite faring slightly better, gaining 0.3%.
The story was similar in Europe as the regional Stoxx Europe Share Index fell 1.3% early on Thursday amid concerns about the new variant. The UK’s FTSE 100 fell around one percent with Germany’s DAX losing around 1.3%. Both indices were still moderately positive for the week though, as they clawed some gains back from severe losses last week, with the FTSE 100 gaining 0.8% and the DAX up 1.3%.
Locally the JSE All Share Index appreciated 1.5% for the week, driven by a strong performance in the resource and financial indices, which gained 3.3% and 3.2% respectively. Impala Platinum was the standout performer in the resource sector for the week, gaining 19.2% on the back of their announcement to acquire 100% of Royal Bafokeng Platinum. Sasol had another very strong week as the counter surged 15% to R284. The strong performance in the financial sector was driven by the share price of the Absa Group which increased by 11.6% for the week; followed closely by Growthpoint Properties, up 10.9%, and Nedbank, which gained 10.5%.
OIL TANKS ON NEW VARIANT NEWS
West Texas Intermediate (WTI) futures tumbled to below $70 for the first time since mid-September, adding to the bearish momentum which began in mid-November. At the peak of the energy crunch, which gripped most parts of Europe and China, oil futures traded as high as $85. However, prices have cooled after China’s aggressive response to liberalise coal production, and more recently the announcement that the US and China could release their petroleum reserves. News of the Omicron variant also contributed to the sell-off, the rationale being that renewed lockdown measure and travel bans could impact fuel demand.
Following some mid-week volatility, gold traded at $1 775 per fine ounce on Thursday. Gold has struggled to rise above the $1 800 level after a strong rally in early-to-mid November saw it touch $1 874. Since these highs, US inflation expectations have moderated while US real yields improved slightly, leading to downward pressure on the precious metal. The US Fed Chair’s statement on Tuesday, that elevated inflation could persist for longer, spooked the market a bit and sent gold to around $1 808, but the move up was soon reversed.
Copper futures fell to $4.21 this week as the pandemic developments dampened the outlook for demand growth over the short-term and likely complicates the global supply chain. While the outlook on copper seems negative, futures prices recovered to $4.28 on Thursday which is within the range copper has traded during the second half of the year.
CURRENCIES: CALM BEFORE THE STORM
Currency markets were steady early on Thursday, as investors awaited information on the threat posed by the Omicron variant and the speed with which the Fed may reduce stimulus. The US Dollar Index was down 0.2% on the day at 95.9 and has been retreating since last week after the news of the new variant first emerged, but still remains close to its 16-month high of 96.9 in November.
The Turkish lira continued its dramatic descent against the dollar, sliding by a further 4.7% this week to 13.40 to the dollar, after the Turkish president named a loyalist as the new finance minister. Concerns around Turkey’s economic policy, which is largely driven by the president, have been a major concern and the currency has lost around 45% of its value this year.
The South African rand weakened to R16.32 to the dollar last Friday following the news of the Omicron variant, but currency has since recovered somewhat, buoyed by the fact that President Cyril Ramaphosa did not move South Africa into more stringent lockdown restrictions.
The rand is trading at R16.01/$, R18.10/€ and R21.23/£.
As 2021 draws to a close, we would like to take this opportunity to wish you a blessed and safe festive season. We will be taking a break from sending out the daily and weekly market commentary from 10 December 2021, and will resume on Friday 14 January 2022.