The wider question with respect to Friday’s market collapse and the worst day for equity markets this year, as well as the 13 fall in oil prices, is not so much as to whether it was justified or not, but whether it marks a sea change in market sentiment when it comes to the economic outlook for the global economy, and whether or not we’ve seen the market highs for this year already, according to Michael Hewson, chief market analyst at CMC Markets UK.
“After Friday’s ugly sell-off early indications would suggest we’re going to be in for a bumpy ride this week, as we come to the end of November and beginning of December, with today’s market open set to be a positive one despite a slide in Asia markets, as investors strive to understand what comes next,” London-based Hewson shared with City A.M. this morning.
“We’ve always known that new variants could well be a problem, and yet over the past 12 months there have been many reports of possible candidates that might be a concern that have come and gone without getting the sort of market reaction we saw on Friday.”
Hewson points out it is also not that clear this newly renamed Omicron variant is any more deadly than the current more prevalent Delta variant, which for the most part is still causing its own fair share of problems in Europe as it is, having replaced Alpha earlier this year, without the same sort of market reaction.
Initial reports out of South Africa would appear to suggest that despite the number of mutations currently identified, there have been no reports of hospitalisations or deaths as a result of anyone being diagnosed with this variant, which throws into sharp focus why last week’s market reaction was so violent.
“It is of course still very early days, amidst the uncertainty around treatment and vaccine efficacy of this new strain, and while it may well be more transmissible, that doesn’t necessarily mean it is more deadly, with initial reports suggesting symptoms are “unusual but mild” in nature,” Hewson continued.
This could help explain why markets in Europe look set for a rebound this morning.
There is the possibility that some of the thin liquidity conditions seen on Friday, along with automated stop losses being triggered exacerbated Friday’s sell off, the worst one this year, and worst decline since June 2020.
“We certainly can’t say it wasn’t overdue given how markets have behaved this year, and with governments reaching for the travel ban and restrictions playbook once again we could well see renewed pressure on the likes of the travel and leisure sector, as well as hospitality, and perhaps that also helps explain why markets reacted the way they did,” Hewson noted.
“It may not be so much the prospect of a new variant that is taxing the markets appetite for risk, rather than government’s reactions to it, which appear to come across as going backwards and being overly cautious, at a time when the focus was very much on a covid exit strategy,” he added.
Travel bans and masks
Travel bans, newly mandated mask wearing in shops and public transport tends to be a slippery slope, and in a fashion that is almost identical to a year ago, here we are again with questions being asked about Christmas in populations that are for the most part double-jabbed, and well on the way to being triple jabbed.
“This may help to explain the outsized reaction we saw in the likes of airline shares which got absolutely hammered on Friday and will certainly continue to be subject to the ebb and flow of worry, as concerns grow as to what the next two weeks will mean for these beleaguered sectors,” Hewson said.
Concern over going down the lockdown route may well also explain why governments are going in hard early on, because they fear the consequences of trying to impose another Christmas lockdown.
“The decline in the oil price, over concerns that any new restrictions could impact demand also appears somewhat overdone, which helps explain this morning’s subsequent rebound, although it will be welcome news for beleaguered consumers, who have had to endure sharp increases in petrol prices.”
The reimposition of self-isolation mandates for close contacts of any infected people is also likely to be bad news for supply chains, in the same way the August “pingdemic” turned out to be.
“The next few days will certainly make the next OPEC+ meeting a much more interesting affair,” Hewson said, “given they were expected to raise their output levels by another 400k barrels a day from the beginning of December.”
The fall below $75 a barrel will probably give OPEC a little pause for thought, even if the Biden administration will claim it was the SPR release that helped, and dress it up as a policy win.
“Whatever this week brings, economic data is probably going to be secondary, with the US payrolls report for November due on Friday, while here in the UK we have the latest mortgage approvals and consumer credit data for October later today,” Hewson concluded.