American futures are up while those in Europe are down after the Dow Jones Industrial Average dropped nearly 900 points in its session on Friday. The massive selloff in stock markets was triggered by the discovery of a new coronavirus variant, Omicron, emerging from South Africa. As the newly found variant seems to have double the mutations compared to the Delta variant, experts think that it could be more contagious and spread rapidly across the globe.
The Federal Reserve, which is moving to start tapering its massive stimulus, will likely have to rethink its strategy of whether to prolong pumping liquidity to support the American economy or continue with its initial plan and start winding down its quantitative easing measures. To get some idea of what Fed officials are thinking, investors should closely watch Fed Chair Jerome Powell’s comments, today, at a webinar conducted by the New York Fed.
In Friday’s session, the Dow Jones Industrial Average dropped 2.53%, while the S&P 500 index dipped 2.27%. The Nasdaq, the tech-heavy index, slumped 2.23%.
The selling spree of stocks was sparked by WHO’s statements labelling the Omicron variant a “variant of concern.” As a result, stocks of companies positively linked to reopening started to bleed as countries quickly decided to impose travel restrictions to curb the spread of the virus. Cases of Omicron were first found in South Africa, but now cases have emerged in other nations as well, such as United Kingdom, Netherlands, Germany, and Israel.
The major risk to markets is whether the current vaccinations will be effective against the Omicron variant or not. However, according to vaccine manufacturers, it is too soon to make a judgement on this, and they are investigating the repercussions of the variant for now. However, Paul Burton, Chief Medical Officer of Moderna, stated that his company could release a modified version of the vaccine to combat the new variant by early 2022.
Moving onwards, the biggest risk causing uncertainty in stock markets will likely be news regarding the Omicron variant. Currently, it is too soon to communicate to what extent the variant will likely affect stock markets and general market sentiment. However, after the news, the volatility index has jumped to 28.62 and expectations for the first interest hike by 25 basis points have been extended from June 2022 to July 2022. Raphael Bostic, President of the Atlanta Federal Reserve, seemed optimistic that the American economy could withstand the Omicron variant and that the Fed should quickly start tapering its asset purchases to control rising consumer prices.
Bitcoin, the king of cryptocurrencies, was no exception to the drop in values seen in financial markets. Following the news, Bitcoin was nearly 20% lower than its all-time high of $69,000. However, over the weekend, Bitcoin was able to recover some of its lost territory and has climbed to around $57,300.
On the other hand, adoption of cryptocurrencies is on the rise. Thailand is the latest nation to declare that it is working to somehow use wealth generated by crypto millionaires to fuel its tourism sector, which has been severely impacted by the coronavirus pandemic. It is estimated that nearly $80 billion in revenue has been lost over the pandemic era. Thailand’s tourism authority is coordinating with a local crypto exchange and national regulators to find ways to accept digital coins as payment for travel and other services.
The idea is to ease restrictions and make it easy for consumers to use and spend cryptocurrencies. However, the development in this area is likely to take time until a framework is established, and widespread acceptance of these digital tokens is achieved.
On Friday, because of the Omicron news, sentiment regarding the outlook for oil demand turned negative as investors feared the resumption of lockdowns and travel restrictions. As a result, oil prices fell nearly 13% and dropped below the $70 per barrel mark. This was the worst day for oil since the coronavirus pandemic began in 2020.
Responding to the change in market dynamics, OPEC+ has extended its technical committee meeting from Monday to Wednesday and its meeting comprising of a ministerial monitoring committee from Tuesday to Thursday. The objective of extending the meetings is to get more information on how the new coronavirus strain will likely impact demand in coming months. At these meetings, the cartel will also likely gauge how countries’ use of their strategic petroleum reserves will impact oil demand for OPEC+ nations.
The dollar index, a benchmark measuring the U.S. dollar against other major currencies and treasury yields, dropped after the Omicron news. The dollar index fell nearly 0.4% from its highest point in 16 months. Gold prices move in the opposite direction to treasury yields and the dollar index as the opportunity cost of holding the precious metal declines and make it more appealing to investors. Furthermore, because investors are decreasing their exposures to risky assets, demand for safe-have commodities like gold has risen, pushing gold prices up. Moving forward, how the Fed reacts, whether hawkish or dovish, to the Omicron variant will be the main driver for gold prices.
Asian Pacific Markets
Asian Pacific stock markets are broadly declining as investors closely monitor how the new COVID-19 variant impacts countries over the next few weeks. As a result of these new cases, the zero COVID cases strategy implemented by Beijing is here to stay. As per studies conducted by Peking University, diverting from this approach could cause China nearly 637,155 infections per day.
As of 12.54 a.m. EST, the Nikkei dropped 0.81%, and the Shanghai index slumped 0.04%. The Hang Seng index, in Hong Kong, dipped 0.52%. The ASX 200 index fell 0.26%, and the Seoul Kospi declined 0.39%.