Omicron causes severe or mild illness symptoms

Markets

The new Covid-variant which caused havoc across markets last Friday has been labelled “Omicron”. The WHO declared it a “variant of concern”. The jury is still out whether Omicron causes severe or mild illness symptoms. Answering that question will be crucial in assessing the new Covid-variant’s shelf date as a market theme. In the very short term, we’d prefer to err on the side of caution as several governments reacted very promptly in introducing travel restrictions to slow the virus from spreading. Friday’s market moves were impressive. Investors decided to take some chips off the table as uncertainty over the new Covid-variant was very high ahead of the weekend. Better to be safe than sorry. European stock markets lost 4%-5% with main US indices ending 2.5% lower. Heavy risk aversion generated a bid for core bonds. US yields declined by 13.6 bps (30-yr) to 18.3 bps (5-yr) in a move where the belly of the curve outperformed the wings. The US 10-yr yield’s test of the October high at 1.7% abruptly ended, but the medium term technical picture isn’t altered yet. The German yield curve showed more of a bull flattening trend with yields shedding 2.2 bps (2-yr) to 8.6 bps (10-yr). The German 10-yr yield’s attempt to retake lost support at -0.19% ended in a similar sudden way. It is currently back to testing key support at -0.35% (November low & 62% retracement on August-October move higher). 10-yr yield spreads vs Germany widened marginally with Greece (+4 bps) underperforming. The ECB’s ostrich politics on inflation for once helped the euro. In the heavy risk-off market setting, EUR/USD rebounded from the low 1.12 area to close near 1.1330. Relative yield dynamics and EUR’s absolute JPY characteristics help explain the single currency’s unusual outperformance during risk aversion. Only JPY and CHF were in an even better position. USD/JPY dropped two big figures from the low 115 to the low 113, coming off the best levels since 2017. EUR/JPY set a new YTD low below 128 with EUR/CHF at a multi-year low sub 1.0450. EUR/GBP followed EUR/USD’s bounce higher to close just below 0.85.

Most of Friday’s moves are for a small part reversed this morning as doom scenarios about Omicron’s transmissibility and symptoms are for now downplayed. Uncertainty around Omicron suggest cautiousness to immediately bet on a fresh turnaround. It will be today’s main talking point, dwarfing eco releases (EC confidence data, German CPI) and speeches by ECB/Fed governors. We wonder whether that will remain the case as this week’s back-loaded agenda looks very appealing with US ISM’s, ADP employment and payrolls all scheduled for release between Wednesday and Friday. European investors will be interested in tomorrow’s CPI print.

News headlines

The World Health Organization is stepping up efforts to understand the development of the new Omicron corona-variant. According to a statement on Sunday, WHO indicated that there is no information yet that the symptoms of the new variant are different from other variants. According to the WHO it is not clear the new Omicron coronavirus variant is more transmissible compared to other variants or if it causes more severe disease. WHO is working with technical partners to understand the potential impact of this variant on our existing countermeasures, including vaccines. During the weekend, governments from multiple countries already banned travelers from southern African countries. Israel even already banned the entry of all foreign travelers. Japan will take a similar measure.

OPEC+ has delayed two technical meetings as it wants more time to assess the impact of the new Omicron coronavirus variant on the balance between demand and supply on the oil market. In its process of winding down last year’s production cuts, OPEC+ over the previous months added 400 000 barrels per day. However, the cartel recently already indicated that the US and other countries releasing strategic reserves could lead to oversupply early next year. According to sources OPEC+ is inclined to slow of even halt the pace of reducing output cuts. A decision in expected on Thursday. Brent oil tumbled from $81/b to $72/b on Friday and tries a modest rebound this morning ($75 p/b). 

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