Investors brace for fallout from new Covid-19 Omicron strain

Australian shares face big falls on Monday after fear of a new Covid-19 variant discovered in South Africa spooked risky assets and boosted safe ­havens.

The S&P/ASX 200 is set to break below its 200-day moving average for the first time in 13 months and test its September 29th low at 7145.7. Picture: NCA NewsWire/David Swift

Global markets are set to remain volatile, with Australian shares facing big falls on Monday after fear of a new Covid-19 variant discovered in South Africa spooked risky assets and boosted safe ­havens in a blow to sentiment that threatens to scuttle the usual pre-Christmas rally in shares.

S&P/ASX 200 index futures dived 104 points, or 1.4 per cent, to 7166 points, the dollar hit a 12-month low of US71.23c and Australia’s 10-year commonwealth government bond yield fell 13 basis points to 1.737 per cent amid fears that the new, fast-spreading variant – Omicron – may evade existing vaccines and prompt lockdowns that threaten economic growth.

The S&P/ASX 200 is set to break below its 200-day moving average for the first time in 13 months and test its September 29 low at 7145.7 points. Travel stocks will be in the firing line, along with the economically sensitive energy, financials and consumer discretionary sectors.

In its biggest one-day fall since February 25 and its worst post-Thanksgiving performance since 1941, the S&P 500 fell 2.3 per cent to a four-week low of 4594.6 with energy, financials, industrials, real estate, industrials and consumer discretionary sectors faring worst.

Tribeca Investment Partners Asia chief executive Ben Cleary said the world was now in “a ‘mutate, innovate, repeat’ endemic, not pandemic, environment”.

“Initial feedback from the doctor in South Africa that alerted authorities is that symptoms are mild (but) it is hard to see macro policy not remaining loose in this environment,” Mr Cleary said.

In a note at the weekend, AMP Capital economist Shane Oliver said it would take “a few weeks to get a clearer picture” of the impact of the Omicron variant.

“So far the falls in markets just look like normal corrections in a bull market, but of course much will depend on what we learn about the new virus and its impact in the next few weeks,” he wrote.

Brent crude oil plunged 12 per cent to $US72.72 barrel, breaking below its 200-day moving average for the first time in 13 months. Singapore iron ore futures fell 5.6 per cent to $US95.87 a tonne.

Mr Cleary said the fall in the oil price on Friday was larger than that during last winter’s Covid-19 wave. “It seems excessive given this weekend’s policy reactions around the globe seem to be very limited at the margin,” he said.

“We have the finger on the buy trigger as we await more news on spread and vaccine relief.”

Australian authorities moved to reimpose quarantine measures in a bid to keep the Omicron variant out of the country, even as health officials said it would be an impossible task.

Two passengers who arrived from southern African on Saturday night tested positive to the new strain, among at least 69 entering through countries of concern. The commonwealth has not ruled out further border closures

“This is not like it was back in February and March of 2020,” Scott Morrison on Sunday.

“We now have good knowledge. Good advice. The uncertainties are not like they used to be,” the Prime Minister added.

Capital Economics senior economist Jonas Goltermann said: “It is too early to know to what extent the new variant will affect economies and markets, and Friday’s market moves have probably been exacerbated by reduced liquidity owing to the US Thanksgiving holiday.

“That said, most markets appeared to be discounting an optimistic view on both the pace of the economic recovery and the path of the pandemic – both assumptions are now at risk,” Mr Goltermann added.

Steve Glass, managing director at Pella Funds Management, said despite the need for further scientific information about Omicron, “one of the main reasons there has been such a strong response from the global community is that we learned from the Delta strain that if you don’t manage it quickly, the variant could create huge impact”.

“The prudent thing to do is not ignore the danger but equally not jump at shadows,” he said. “We think the key message is don’t bet the farm on a Covid outcome because the one thing we do know is that this virus is full of twists and turns that is surprising even the most clued in medical minds.”

Volatility soared with the CBOE VIX volatility index up 10 percentage points to 28.62 per cent, its highest close since February 25, as investors flocked to safe havens. The US 10-year Treasury bond yield dropped 16 basis points to 1.4731 per cent – its biggest fall since March.

The Australian dollar fell despite a 0.7 per cent drop in the US dollar index as the greenback dived 1.7 per cent against the yen and 1.4 per cent versus the Swiss Franc. The euro surged 1 per cent against the US dollar as expectations of US rate rises were dialled back.

Spot gold rose 0.8 per cent to a four-day high of $US1802.59 on Friday. Bitcoin fell as much as 9 per cent to a six-week low of $US54,019.74.

Wealthi co-founder Peter Esho said new lockdowns would be bad for travel and hospitality shares, and good for technology companies and others that tended to benefit from lockdowns.

“The overall stockmarket is vulnerable, so there could be a short-term correction,” he said.

“This will be an opportunity to buy once the dust settles.

“We’ve been expecting things to get better, but Omicron dents this expectation severely.

“Even if it’s nothing, authorities will be worried about another variant emerging, so we’re going into 2022 with more uncertainty and more caution.”

It comes at the start of a big week of domestic economic data. Company profits and inventories data for the September quarter are due on Monday, quarterly balance of payments and monthly building approvals data are due on Wednesday, and national accounts data on Thursday along with CoreLogic’s house price index for November.

Reserve Bank deputy governor Guy Debelle is due to speak at two events this week, but will be constrained from speaking about the effects of the pandemic on monetary policy because of the “blackout period” before the board meeting next Tuesday week.

Additional reporting: Perry Williams