European stocks drop as concerns over Omicron variant flare up

European stocks drop as concerns over Omicron variant flare up

Global stock markets and oil prices fell on Tuesday, while investors parked cash in high-grade government bonds, as trading was dominated by concerns over the Omicron coronavirus variant.

Europe’s regional Stoxx 600 share index, which had rallied on Monday along with Wall Street stocks to reflect a burst of optimism that market volatility sparked by Omicron would turn out to be a buying opportunity, fell about 1.3 per cent with the UK’s FTSE 100, Germany’s Dax and France’s Cac 40 all down by about the same amount.

Futures contracts tracking Wall Street’s S&P 500 gauge fell 1.1 per cent. In Asia, Hong Kong’s Hang Seng index fell 1.6 per cent and Tokyo’s Nikkei 225 lost 1.6 per cent.

The moves came after Stéphane Bancel, chief executive of vaccine maker Moderna, used an interview with the Financial Times to predict that existing vaccines would be much less effective at tackling Omicron than earlier strains of coronavirus. He also warned that pharmaceutical companies would take months to manufacture new variant-specific jabs at scale.

Brent crude, the international oil benchmark, lost more than 3 per cent to $71.11 a barrel, hitting its lowest level in nearly three months.

Investors widely expect markets to remain volatile as more information emerges about Omicron and the capacity of governments and existing vaccine programmes to contain it.

“I suspect that for the next few weeks markets are going to be all about Omicron,” said Patrick Spencer, vice-chair of equities at RW Baird.

“We’re all flying blind on the data,” he added, referring to scientists’ uncertainty over the severity of symptoms that may be caused by the new variant, which has a highly unusual genetic profile.

Wall Street’s Vix index, a measure of expected volatility in the stock market, jumped to 26 on Tuesday from 23 the previous day — leaving it further above its long-run average of 20.

The yield on the 10-year Treasury note dropped 0.11 percentage points to 1.43 per cent, reflecting a sharp rise in the price of the benchmark government debt instrument.

The dollar index, which measures the US currency against six others, fell 0.7 per cent as traders eased back on bets on how quickly the Federal Reserve would raise interest rates next year.

Although the US has not detected any Omicron cases so far, President Joe Biden has predicted it will emerge there.

“The magnitude of market reactions may still increase if we start seeing cases of this variant in the US,” said Tancredi Cordero, founder and chief executive of investment advisory boutique Kuros Associates.

“Markets came into this from a place of complacency,” he added, noting that the S&P 500 and the Stoxx had hit record highs earlier this month despite the US central bank announcing the start of reductions to its $120bn a month monetary stimulus and high levels of global inflation.

In prepared remarks ahead of an appearance before Congress later on Tuesday, Fed chair Jay Powell said rising Covid-19 cases and the Omicron variant “pose downside risks to employment and economic activity and increased uncertainty for inflation”.

Oil prices, which dropped more than 10 per cent on Friday, would “not re-gain all the lost ground until after the end of this year”, said Tamas Varga of oil brokerage PVM.

“This is simply because it will take time to evaluate the damage caused by the rise of the latest variant of the virus.”

Additional reporting by Neil Hume in London

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