Markets bullish on uncertainty surrounding omicron
Further disruption to supply chains will intensify existing inflationary pressures
Is everyone buying the dip? Global equity markets have bounced back, recovering last week’s omicron-driven losses, as fears about the impact of the latest coronavirus variant on economic growth ease.
Oil prices joined the party after plunging last week on omicron fears. Gas prices also pushed higher though that is more linked to Washington’s warning of “nuclear” sanctions against Russia if it decides to invade Ukraine.
But whatever the markets are saying right now, it is clear the number of omicron cases is rising quickly and governments are worried enough to have imposed fresh restrictions on at least some — mostly leisure related — economic activity to combat the increase. Financial markets have perhaps bullishly interpreted the WHO declaration that it is too early to determine whether omicron causes more serious illness, or whether it is immune to current vaccines. The WHO also pointed out that no one has so far died with the variant despite its existence in 38 countries.
Against that, a study from South Africa, published on Friday, found omicron is 2.4 times more likely than previous variants to reinfect someone who has already had COVID-19. Jeremy Farrar, director of the medical research group Wellcome Trust, commented recently that the “variant reminds us all that we remain closer to the start of the pandemic than the end.” This is why, unlike financial markets, governments are currently hedging their bets.
Speaking last week, US Treasury Secretary Janet Yellen, warned the variant could slow global economic growth by exacerbating existing pandemic induced supply chain problems and choking consumer demand. Her view was echoed by International Monetary Fund chief Kristalina Georgieva.
Further disruption to supply chains will intensify existing record inflationary pressures in the global economy amid the still tentative vaccine induced recovery. Thus, along with the risk omicron poses, there are concerns about central bank tightening, primarily from the US Federal Reserve.
Mark Haefele at UBS Global
Wealth Management is optimistic about growth but cautioned: “We see two bear cases: First, that omicron has sufficiently severe symptoms and transmissibility that governments turn to lockdowns to control the outbreak. The second bear case is that government restrictions delay a normalization of supply chains and drive fears of stagflation and monetary tightening.”
Commenting on omicron impact on the oil market, JP Morgan analyst Natasha Kaneva said she expected a 650 kbd (1,000 barrels per day) impact to oil demand, with reduction almost evenly split in percentage terms among jet fuel, diesel and gasoline.