The Omicron mutation ‘hits’ the shares

By Mike O’Sullivan

Friday’s sell-off in stock markets was the worst so far this year, although after seven consecutive weeks of rising US stocks, the correction was undoubtedly delayed. In addition, the jump of more than 50% in the Vix volatility index reveals the surprise the market experienced in the news of the emergence of the new coronavirus (Omicron) mutation, at a time when markets were generally focused on the risks posed by rising inflation. .

The sell-off, and in a limited session (due to Black Friday), was the result of an overreaction to the Omicron mutation – oil suffered strong losses, 10-year US bond yields fell below 1.5%, while Risk management anxiety may remain strong at Monday’s meeting. From this point on, there are three scenarios for the course of the stock market towards 2022.

Scenario 1: Replay of March 2020

In the first scenario, the Omicron strain of the coronavirus proves to be more resistant and more deadly than the existing strains, while the indications that it has already spread throughout Europe are intensifying.

The UK has already imposed tougher travel restrictions and other countries are following suit, leading to a halt in economic activity and the risk of Europe returning to recession at a time when China’s economy is already suffering.

Markets are unprepared for this eventuality and central banks are known to have little room for maneuver.

It is a bearish mix and based on current valuations it could cause a “deep” correction of the S&P 500 index to 4,200 points, with other stocks, commodities and cryptocurrencies also hitting.

Scenario 2: Rise of the S&P 500 to 5,000 units

In the second scenario, investors soon realize that South Africa in particular has advanced medical capabilities in treating rare and infectious patients, and although the number of coronavirus cases is rising rapidly, deaths are still close to the threshold.

In addition, coronavirus vaccines can be adapted to treat the new mutation.

Markets also realize that the short-term effect of Omicron fears will be to reduce inflation in a few months (eg lower oil prices and lower air fares), which will help maintain bond yields. at low levels.

If the evidence for the spread of Omicron in Europe is insufficient, then the markets will probably recover the lost ground and entering December, with the aggressive inflow of funds into the markets, investors will begin to seriously consider the rise of the S&P 500 in level of 5,000 units.

Scenario 3: Step by step

According to the third scenario, the immediate data on the spread of the Omicron strain are minimal, but its detection is an “alarm bell”, while in general health protection and preventive measures are strengthened throughout Europe and the United States.

This is also a “warning” to investors regarding central bank placements and lack of room for maneuver.

Compensating to the whole situation is the accelerated recovery in the developed world and the possibility that China will take action to stimulate its economy.

As a result, markets will stabilize by the end of the year, but volatility will decline.

In my opinion, the second and third scenarios are most likely to happen, which indicates an upward trend from the current level to the end of the year, when volatility weakens.