Say hi to Omicron

Omicron wreaked havoc in the markets on Friday, sending European indices near 5% lower into Friday’s close. The selloff in the US was a bit less severe, but this is obviously not the performance we were expecting on Black Friday.

Now, of course, the kneejerk selloff we saw was also amplified with the fact that it was the Thanksgiving week; some traders were off, and that led to thinner market volumes, hence a bit more volatility. The selloff was certainly also amplified with the fact that it was Friday, where some traders may have simply reduced exposure to weekend news.  

And weekend news were mixed

Of course, the governments are quite experienced by now, so none was keen to wait and see we what would happen next. The reaction came fast, and included the well-known travel restriction measures, halting flights, restoring the entry measures, the tests, the isolation and so. The latter is bad news for the economic activity. 

But the good news is, the WHO said that the symptoms of the new omicron were rather ‘mild’ so far. Therefore, the financial implications could be less worse than what everyone first though.  

Marje action on Monday is not as bad as Friday. Most Asian indices traded in the red, but in most places, losses were less than a percent. In Japan we saw Nikkei give back another 1.30%, but the European and US index futures rebounded. Nasdaq is up by a percent at the time of writing. 

Thanksgiving overshadowed 

It's Cyber Monday, but omicron has overshadowed the year’s biggest shopping event, and I don’t see any news giving a persistent white smile to investors at this point, though good news on the retailer front could help recovering a part of Friday losses.  

Of course, given that we have a lot of uncertainty about the new virus, the mood could easily and rapidly change in both ways. This week, there will be clinical studies to see how well the antibodies and the vaccines respond to omicron, and how severe the symptoms are for all ages group.  

Best for investors would be to avoid panic selloffs, and keep in mind that the lockdown measures have rather been deflationary in the past. In addition, oil tanked to the $70 per barrel, which could also help easing the inflationary pressures if we see the price of a barrel consolidate near the current levels. The latter deflationary factors could buy the central banks some time before they hit the brakes on the monetary stimulus measures. So less hawkish central bank expectations could give support to the equity markets, and to the risk sentiment.  

OPEC? 

OPEC will delay today’s technical meetings to Wednesday to gather more information about omicron, but the broader OPEC+ decision is still expected on Thursday. Oil has been up and down last week on uncertainties of how OPEC would response to the release of strategic reserves from US and other big oil consumers.  

OPEC is obviously not fully happy with the decision. They first announced they could react by reviewing their supply increases, then came the news that they may not respond and keep their line.  

Of course, the new virus strain could give them an excuse to restrict supply, without reviving the dispute with the US and the others. Price-wise, it’s possible that the kneejerk reaction to omicron is overdone, and if the news doesn’t get worse, we should see a  recovery toward the $74 mark, the 100-DMA. If, however the news gets worse, we shall see a further slide below the $70 mark, but the downside should be limited as the worsening omicron news would also revive the expectation of tighter OPEC supply.