Scientist in South Africa has identified a new variant of the Coronavirus that is more transmissible and potentially more dangerous. This new variant has been named the omicron variant by the World Health Organization. The financial market crashed on Friday on the variant news. As we learn more about this variant and its ability to evade COVID vaccine protection, we are expecting more market volatility in the next few weeks.
As of today, the new variant has been categorized as off concern. Scientists from the UK have declared that the new variant is more transmissible and could evade the protection of COVID vaccines. Potentially the omicron variant can also cause more serious COVID cases and higher death rates.
While not much is known about the variant, we can predict how the new omicron variant will affect the financial market based on the past variant concerns. A more potent variant such as the omicron variant can have a significant impact on the travel sector, cause supply chain disruptions, and affect the monetary policies of the Federal Reserve and other central banks. As the market is processing the information on the new variant, here are a couple of ways the new variant can affect our market in the next couple of months.
Airline industry
The airline industry was one of the hardest-hit industries the coronavirus and its variants such as the delta variant. This is because new variant concerns often lead to travel bans and suspension of flight routes. What’s different this time around is that the governments are very fast at implementing new travel bans. While the new variant was discovered earlier this week, multiple countries, including England, Canada, and Belgium are already implementing travel bans to prevent the omicron variant from further spreading.
The airline industry that has just begun to recover from the travel bans implemented earlier is facing more significant disruption. While some companies just started to hire back their staff, the new travel bans will put further strain on the companies’ ability to support their staff and maintain their current operation.
An extended travel ban will put significant strain on the cash reserve of airlines while at the same time reducing their further cashflow projection and profitability. As a result, airline stocks tend to underperform and crash on coronavirus variant news. The stronger the variant, the longer and more painful the selloff.
The energy sector
In Q3 2020, the oil price has been breaking records due to supply chain disruptions and increased demand. As a result, many countries had to tap into their strategic oil reserve in order to lower oil prices and balance the supply and demand. However, as we have seen in March 2020, coronavirus and travel bans tend to have a cooling effect on the oil price. The omicron variant could spell a very different future for the energy market.
Overall price level and inflation.
Since August 2021, the US has been facing strong inflation that exceeded the expectations of central bankers. What was originally was thought of as transitory inflation turned out to be stronger and more long-lasting.
However, a lower oil price can lower the cost of production for many companies across different industries. As a result, a variant can also cool down the inflation in the economy.
Tech industry
The tech industry and inflation have formed an inverse relationship. Whenever there is a high level of inflation in the economy, the tech sector tends to sell off due to the higher discount rate of their future earnings. With lower inflation, a new covid variant like the omicron variant could potentially boost the valuation of tech companies and their stock prices. This might lead to even more elevated prices for stocks like Facebook and Telsa who have broken many records in recent months.
Interest rate hike and tapering from the Federal Reserve
The last potential impact of a significant variant and another wave of Coronavirus infections is that this will delay the Federal Reserve’s schedule for tapering as well as interest rate hikes. In March 2020, the Federal Reserve started a more aggressive bond-buying program as well as lowering interest rates to fight the negative financial effect of the coronavirus pandemic. Since then, as the pandemic is getting under control, the Fed has signaled that it’s planning to tighten its monetary policies. However, a more significant new variant could delay the schedule of tapering and interest rate hikes. We could be seeing a more accommodating monetary environment due to the omicron variant.
Accommodating monetary policies can boost asset valuation but covid variants also bring significant volatilities to the market. These two forces will like increase market volatility as investors are understanding more about the new omicron variant and its impact and severity.
Conclusion
The impact of coronavirus variants is complex. It always comes with not only volatility in the market but a long-lasting impact on our economy. Ultimately, the impact of the variant depends on its transmissibility and its ability to cause severe cases by bypassing the protection of COVID vaccines. A more serious and dangerous variant could lead to even worse market conditions than we have seen in March 2020. As the world is still processing the news and understanding this new omicron variant, Investors must stay cautious and vigilant to assess the impact of the omicron variant to manage their risks and avoid losses.
It’s a good time to review your portfolio and understand your risk exposure in various sectors mentioned above. A good understanding of your risk position will help you make faster and better decisions in a changing world.
