Cold winds blow as omicron discovery halts market recovery

Despite early fears of a vaccine resistant strain to the new omicron strain, there is not yet have enough evidence to evaluate its impact

THE revelation at the end of last week of the new omicron variant of coronavirus had a dramatic reaction in markets.

On Friday we saw the biggest fall in the FTSE 100 for18 months when it tumbled 266 points, or 3.6 per cent. This was a global phenomenon as markets everywhere plunged on fears of the unknown new variant.

The markets have had a strong run over the past year, largely inspired by the vaccine roll-out, but this was brought to an abrupt end last week.

The oil price also saw a 10 per cent fall, which comes after a strong rally. The Vix index, which measures volatility, surged by the most in ten months. The worst hit stocks included travel groups and airlines, while the high-profile vaccine producers such as Pfizer and Moderna bucked the trend.

The overwhelming message is that as yet there is insufficient information about omicron, but it is to be hoped that we will get more clarity over the course of this week.

Despite early fears of a vaccine resistant strain, we do not yet have enough evidence to evaluate the impact; clearly the fear is that it will bring the economic (and social) bounce back to an abrupt end. Last week saw the US markets closed for Thanksgiving on Thursday and only open for a half day on Friday, this meant very low volumes of trading, which clearly exacerbated the situation.

It is quite impossible to predict how this will evolve. Some reports appear to indicate that it is a mild variant, but it is very early days, and it seems wise to wait for more evidence. One positive is that it was identified very swiftly and communication has been good, enabling a quick reaction globally. It has certainly done much to divert attention away from the impending interest rate rises and the spectre of inflation, but such major factors are only temporarily side-lined.

There have been fears that the markets have rallied too fast since the falls last year and it seems less likely that we will see a strong “santa rally” this year. The real fear for most people is that Christmas will once again be at risk, after last year's very subdued festive season, the hospitality industry has been hoping for a very different outcome this year.

Markets will be watched very carefully this week: at time of writing there has been a cautious upturn in European markets, but markets hate uncertainty and will be desperate for information. For investors the question is should we be buying on the dips? For many investors it is too early to make that call, the markets are after all, at a very different level to where they were in March last year.

However, it seems equally unwise to panic out of the markets despite having seen such a strong rally. To sell out at this stage prompts two questions: what are the alternatives, and when is the right time to go back in. Cautious inactivity seems a sensible option.

:: Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.

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