How the Omicron variant is infecting markets: Charts of the week
Equities, oil and bond yields are all down.
Omicron is sending shockwaves through financial markets as it spreads around the world. Oil, bond yields and large-cap US technology stocks have all declined in a week of volatile trading.
In today’s Charts of the week, we take a whistle stop tour through the impact of Omicron on the Australia stock market and overseas, compare the fallout to previous Delta-variant and check what bond markets offer as a guide to the future.
Volatility reigns in US equity markets
Equity markets have been volatile since fears of a new coronavirus variant first surfaced over the Thanksgiving holiday period.
US equity markets seesawed between gains and losses in a bout of volatility not seen since October 2020.
Pessimists remain in control. Since 24 November, the Morningstar Australia and Morningstar US indexes are down 2.3% and 3.7%, respectively.
Worse than Delta (so far)
So far, the Omicron dip is sharper and more sustained than a prior dip related to the Delta variant in July.
Global markets fell sharply on 19 July as worries about the Delta variant peaked, but within days, markets had regained ground. Comparing a similar 8-day period on either side of the first market dip illustrates how seriously markets are taking the latest variant—so far.
Technology weighs on markets
Technology mega-cap stocks, the stars of the 2020 lockdown economy, are faring worse since the Omicron variant broke.
Shares for Meta Platforms (formerly Facebook), Netflix, Alphabet, Amazon and Microsoft are down between 3.4% and 11%. Meta and Netflix fell furthest, declining roughly 10% each.
Apple is the one exception, finishing flat during the volatile seven trading days since markets first dipped.
The sharp moves in tech stocks highlight how quickly investments that were widely-favoured by individual and institutional investors alike have retreated, in some cases dragging the broader market lower as they unravelled.
Many investors now expect the Fed to raise interest rates next year after a prolonged period of keeping them near zero, a policy that has propelled the market to record after record over the past year.
Poor performance comes as the influence of the tech giants on the index wanes. In 2020, the five largest stocks—four of which were tech giants—contributed more than a third of the US index’s returns. That’s down to 8% this year.
Energy dips for the ASX
At home, the energy sector has been hit hardest by the Omicron dip. The Morningstar Australia Energy sub-sector is down 6.7% since 24 November, with consumer defensives and healthcare also among the decliners.
Energy index heavyweights Santos (ASX: STO) and Woodside (ASX: WPL) fell between 4% and 6%. The two names make up roughly half the Morningstar Australia index.
Poor performance for energy stocks tracks the steady decline in oil prices. The global benchmark Brent Crude fell 15% between 24 November and 3 December as the Omicron variant threatened the outlook for energy demand.
Equity investors remain firmly in the black despite the latest volatility. The Morningstar Australia Index is up 14.6% and the latest declines in the US are yet to eat away at the 6.8% gain from October when stronger-than-expect quarter three earnings fuelled a rally.
Investors flock to the safety of government bonds
The uncertainty around Omicron is roiling the multi-trillion-dollar fixed interest market. Investors are retreating to the safety of government debt even as they parse the US Federal Reserve’s increasingly hawkish stance.
In separate statements last week, US Federal Chairman Jerome Powell and Reserve Bank of Atlanta President Raphael Bostic both suggested the Fed could accelerate the end of its $120 billion-a-month bond buying program in the face of inflationary pressures. This could.
The yield on the benchmark 10-year Treasury note fell to 1.34% last Friday, recording the biggest one-week yield decline since June 2020. Yields and prices move inversely. Australian bonds declined in tandem, reaching 1.62% on Friday.
Bond markets are pricing in lower growth
No one knows the path of the variant, but a popular forward-looking measure suggests investors are factoring in lower economic growth.
The 5-year breakeven inflation rate measures the average inflation investors expect over the next five years. It has dipped considerably since 24 November, falling to 2.72% in the days since the Omicron dip.
That decline reflects more than the virus. Investors are also factoring in the actions of central banks and economic growth more broadly among other issues. Still, the rapid shift does suggest a dampening of growth expectations, which feeds into inflation.