New Covid variant rattles markets

Khatija Haque - Head of Research & Chief Economist
Published Date: 29 November 2021

 

  • Markets responded negatively on Friday to the announcement of a new variant of concern – Omicron – by WHO, as governments responded with travel bans from Southern Africa and tighter restrictions in countries where cases have been indentifed, including the UK, Germany, Netherlands, Belgium, Czech Republic, Israel and Hong Kong. It will take at least a couple of weeks before more is known about whether Omicron is more dangerous than other variants, or more resistant to existing vaccinations. The week has started calmer in Asian markets this morning, after reports from South Africa that symptoms of the new variant appear to be “mild”.
  • The UAE has suspended entry for passengers arriving from seven countries in southern Africa in response to the emergence of the Omicron variant.  While the region is not one of the largest source markets for the tourists to the UAE, the tightening of travel restrictions more broadly and increased uncertainty could dampen international tourism demand in the near term.
  • OPEC+ will be in focus this week as it meets to decide production levels for January.  Following the release of strategic reserves from the US, Japan, South Korea and other oil importing countries last week, there had been speculation that OPEC+ could slow or halt the planned increase in production in January, as it remains concerned about an oversupply of oil in 2022. The sharp decline in oil prices on Friday in response to the Omicron variant makes such a move more likely.
  • Economic data due this week will centre around activity surveys, inflation data in Europe and the November non-farm payrolls data in the US, which is expected to show a gain of 535k jobs and decline in the unemployment rate to 4.5% from 4.6% in October.

Today’s Economic Data and Events

  • 17:00 GE CPI (Nov) forecast -0.4% m/m and 5.0% y/y
  • 19:00 US pending home sales (Oct) forecast 0.8% m/m

Fixed Income

  • The US 10-year bond yield fell more than 16bp to 1.47% on Friday in a holiday-shortened session on concerns about the potential economic impact of the Omicron variant, and implications for monetary policy.  The market pushed back the expected start of the hiking cycle in the US from June to July 2022, with a total of two rather than three rate hikes now priced in by the end of next year.
  • S&P affirmed Bahrain’s long term foreign currency debt rating at B+ and upgraded the outlook to stable from negative, citing higher oil prices and the government’s fiscal consolidation plan.

FX

  • JPY, CHF, and EUR all benefitted from the risk off tone in markets at the end of last week, strengthening against the USD, while emerging market and commodity currencies weakened. Unsurprisingly, ZAR was one of the biggest losers weakening to the lowest level in more than year on Friday.
  • Bloomberg’s dollar index fell -0.7% on Friday but was still 0.1% stronger w/w.

Equities

  • European equity markets closed down between 4-5% on Friday, while US equities lost more than 2% in the half-day that the market was open.  Unsurprisingly, travel stocks were among the hardest hit.
  • Regional markets closed lower by and large on Sunday as they caught up with global market moves at the end of last week.  Dubai’s DFMGI declined -5.2% yesterday while the Tadawul ASI fell -4.5%.  Abu Dhabi’s ADXGI fared better at -1.8%.

Commodities

  • Oil prices fell sharply on Friday on the back of travel restrictions and the fear of tighter restrictions on movement more broadly.  Brent oil closed the week at under USD 73/b, its lowest level in two and a half months, but recovered in Asian trading this morning to just over USD 76/b as of this writing.   
  • OPEC+ is due to meet this week to decide on production increases for January and may decide to freeze production at current levels for January in light of both the release of strategic reserves by oil importing countries earlier this month, and the potential impact on oil demand from new travel restrictions and other Covid measures.

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