Our header may appear presumptuous, but this week the Omicron fear factor that gripped financial markets last Thursday and Friday, appeared to have reversed as we initially witnessed rebounds in both equities and currencies, with subsequent market directionality driven primarily by a focus on the US Fed’s updated outlook.
Last week’s global market declines, which especially hit the South African market – being the “apparent” source of the new variant – were not entirely unexpected as many political leaders erred on the side of caution without scientific evidence, having mishandled previous Covid waves. For example, travel restrictions were implemented with unprecedented swiftness as various countries were added to so-called ‘red lists’.
Nor was there any real rationale for panic sell-off in financial markets. As leading scientists, epidemiologists and the WHO began to better understand the Omicron variant, markets started to rebound strongly. In South Africa, the rand has largely recovered from R15.95/USD (its pre-Omicron announcement level), to R16.03, while the ALSI is up 0.8% for the same period.
Thankfully, markets have – for now – moved beyond Omicron and are now focusing on global monetary policy and inflation. However, if the severity of the new variant has been underestimated, this will indeed have a renewed and profound impact on most asset classes and currencies.
The lesson to be learnt for investors is not to jump to conclusions based on small data samples where there are potentially large margins for error. Given currently available information, our base case scenario is that the Omicron variant does not warrant a change in the view that the global economy is on a road – albeit bumpy – to a full reopening and that economic recovery will continue.
“If our [decisions] are not evolving with verifiable evidence, they are not reliable [decisions].”
– Carmine Savastano, author
“We are seeing breakthrough infections of people who have been vaccinated, but the infections we’re seeing are very mild to moderate. So, for healthcare workers who have had boosters, it’s mostly mild. I think this whole thing has been so poorly communicated and so much panic generated.”
– Richard Friedland, Netcare Group CEO
Global News
- Concerns about the Omicron variant’s potential impact on global GDP growth prompted a sell-off in risk assets last Friday (26 November). The S&P 500 fell 2.3%, the largest one-day decline since October 2020. The ten-year Treasury yield fell 16 basis points, while the VIX index jumped ten points to 28. At the same time, the expected number of interest rates hikes for 2022 was revised from 2.8 to 2.1.
- Not all economic sectors will rebound. On the tourism front, the coronavirus pandemic will likely cost the global sector $2 trillion in lost revenue in 2021, the UN’s tourism body said this week. The fragility of the sector was compounded by the United States preparing to require all inbound international travellers be tested for the coronavirus one day before departure, regardless of vaccination status, and requiring a second test within three to five days of arrival. The European Commission president, Ursula von der Leyen, has said the trade bloc must consider mandatory vaccination in response to the spread of the “highly contagious” Omicron variant across Europe.
- Federal Reserve chair Jerome Powell has stated that the strong US economy and elevated inflation could warrant ending the central bank’s asset purchases sooner than planned in 2022, though the new Omicron strain of Covid-19 poses a fresh risk to the outlook. He said this would be the topic of the next meeting’s discussion.
- However, global stock markets had rebounded by Wednesday’s close and oil prices surged following Omicron-driven losses. European equities advanced, mirroring most rebounding Asian bourses, as dealers temporarily set aside news of record-high eurozone inflation.
- Subsequently, stocks notched their biggest advance since October as dip buyers scooped up some of the hardest-hit shares during a two-day selloff. Treasuries retreated and Thursday’s gains wiped out Wednesday’s declines.
- Meanwhile, Turkey’s lira extended a record slump after consumer prices rose faster than anticipated and Fitch Ratings cut its outlook on the nation’s sovereign debt, though it pared some of the decline after the central bank intervened in currency markets for the second time this week.
- China’s Didi has announced its intention to delist from the New York Stock Exchange and pivot to Hong Kong. This may spell the end for big Chinese companies heading to the United States to raise money – this only months after the ride-hailing giant’s Wall Street debut, sending a clear signal to investors as tensions between Washington and Beijing generate uncertainty.
Local News
- The JSE was little changed on Friday, following a recovery earlier in the week. The index now stands at 70 989, only 0.5% within Tuesday’s all-time high.
- SA’s October trade surplus narrowed to R19.8 billion, below the Bloomberg consensus of R23 billion. The trade balance has deteriorated compared to the surplus of R35.21 billion recorded a year ago. Total exports recorded reached R147.92 billion, down 5.7% compared to September. The month-on-month decline in exports was much deeper than that recorded for imports, which declined 4.9% to R128.14 billion.
- Long4Life, the SA investment company founded by entrepreneur Brian Joffe, has been valued at about R3.7 billion. This after Old Mutual’s private equity arm proposed R5.80 per share, which is about a 20% discount to the group’s R7.27 net asset value per share at the end of August. Joffe has repeatedly said the share price discount has made it difficult to find acquisition targets that offer a better return than simply using cash to buy back shares.
- Highlighting political risks in the country, President Cyril Ramaphosa, after being accused of leading the ANC to its worst electoral performance since the advent of democracy, could face a vote of no confidence by secret ballot in parliament, an event that could embolden his opponents in the governing party.
Sources: Dynasty, BusinessLive, Bloomberg, Reuters, Analytics Consulting, AFP, Moneyweb, Washington Post, UN News, etc.
