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Wall Street’s worst session in more than a year points to a challenging start to the Australian trading week as investors assess the risk from a new Covid variant.  

Worrying reports about the virulence of the Omicron variant sent investors running for the exits on Friday. Markets in the US and Europe slumped between 2 and 5 per cent.

The Australian share market pre-empted some of the overseas weakness, but futures movements suggest further pain this session. ASX futures skidded 104 points or 1.43 per cent to 7166. An open at that level would be the weakest since early June.

Wall Street

Investors dumped risk assets amid fears the new variant first identified in South Africa might be more transmissible and more resistant to existing vaccines than previous strains. The World Health Organization designated the new strain a “variant of concern”.

The Dow Jones Industrial Average tumbled more than 1,000 points before trimming its loss to 905 points or 2.53 per cent. The fall was the blue-chip average’s largest since October 28 2020.

The S&P 500 shed 107 points or 2.27 per cent. The Nasdaq Composite lost 354 points or 2.23 per cent during a holiday-shortened session. Trade ended three hours earlier than usual, due to Thanksgiving.

“It makes sense to have a market significant correction given the high level of uncertainty,” Jay Hatfield, CEO and portfolio manager at Infrastructure Capital Management, said.

Declines on European markets were heavier yet. The pan-European Stoxx 600 shed 3.67 per cent. Britain’s FTSE 100 lost 3.64 per cent. Markets in Germany, France and Spain lost between 4.15 and 4.96 per cent.

Over the weekend, the variant was detected in Australia, the Netherlands, the UK, Germany, Belgium, Italy, Hong Kong and Israel. Many countries closed their borders to travellers from southern African nations. Israel and Morocco banned all international flights.

A classic flight to safety saw bond prices rise and yields tumble. The yield on ten-year US treasuries dived 15 basis points to 1.48 per cent. Falling rates pulled the financial sector down 3.27 per cent.

Wall Street’s “fear gauge”, the VIX, jumped to its highest in two months. On Friday, Australia’s volatility index rose to its highest in almost three weeks.  

All 11 US sectors declined. Energy stocks led the retreat, falling 4 per cent as US crude prices tanked 13 per cent (more below).

While all cyclical sectors struggled, travel stocks took the biggest hit. The S&P 500 airlines industry index fell 7.2 per cent. Several cruise lines recorded double-digit declines. Aircraft manufacturer Boeing shed 5.41 per cent. Major hotel and casino groups gave up at least 5 per cent.

Australian outlook

The ASX was among the first markets to react to the emerging new Covid variant. The S&P/ASX 200 slid 128 points or 1.73 per cent on Friday to a six-week closing low. Heavy falls in Europe and the US followed as investors sold first, saved the questions for later.

Cooler heads may prevail this session, now investors have had a weekend to observe and assess developments. Currency and equity futures markets seemed calmer this morning. The Australian dollar bounced 0.27 per cent to 71.39 US cents. The Aussie is a classic ‘commodity currency’, reflective of confidence in global economic demand. Buying this morning suggests traders are less concerned about the economic hit from Omicron.

That said, short-term pain still seems highly likely this week until scientists have a better sense of the scale of the threat. Equity markets looked fully valued last week and therefore vulnerable to a decent correction. Whether the downturn is sustained depends on the severity of the threat and how governments react. Renewed lockdowns and travel bans will mean longer-term pain.

“The next few days will be vital,” Peter Esho, co-founder of the Wealthi property investment group, said. “One thing I watch closely is interest rates in the US, particularly the 10-year rates and they dropped significantly overnight. That means markets are taking this seriously.

“Travel bans are already being announced around the world, particularly in countries struggling to contain Delta outbreaks. Oil prices are down significantly, a sign that global travel is about to hit the brakes going into Christmas. So, this is serious and I don’t think we can ignore it.”

So where to put your money to work?

“Bottom line: New lockdowns are bad for travel and hospitality, good for technology names that benefit from lockdowns,” Esho said. “The overall stock market is vulnerable, so there could be a short-term correction. This will be an opportunity to buy once the dust settles.”

In the US, vaccine makers and ‘stay-at-home’ stocks surged. Moderna jumped 20.57 per cent, Pfizer 6.11 per cent, Zoom Video 5.72 per cent and Netflix 1.12 per cent. Defensive healthcare and consumer staples fell less than cyclical sectors. Here, biotechs and the small pool of domestic stay-at-home winners look like prospects in the near-term.  

Turning to the week ahead, domestic economic data is unlikely to have much impact while global factors dictate market direction. Highlights this week include building approvals, private-sector credit data (Tuesday); quarterly GDP (Wednesday); and trade and retail figures on Thursday.

AGM season is in its twilight. There are meetings today for shareholders in Lynas Rare Earths, Mesoblast and Pact Group. Tomorrow: Orocobre, Starpharma Holdings, Omni Bridgeway. Wednesday: Synlait Milk. Thursday: Premier Investments.

IPOs: expect the pipeline to dry up quickly if the Omicron panic continues. At time of writing there were three companies scheduled to list today. Alloggio Group at 12.30 pm AEDT offers short-term accommodation. Andean Mining, also at 12.30 pm, is a copper-gold explorer focussed on Colombia. Parabellum Resources at 2 pm is a NSW-focussed copper-gold explorer.

The rest of the week currently looks like this: Cosmos Exploration (Wednesday); Close the Loop (Thursday); and Orange Minerals and 8 Au (Friday).

Commodities

Oil suffered its biggest hit since April 2020 amid fears of renewed lockdowns and a collapse in demand. The US benchmark, West Texas Intermediate, dived US$10.24 or 13.1 per cent to US$68.15 a barrel during a thinly-traded, holiday-shortened session.

Brent crude settled US$9.50 or 11.6 per cent in the red at US$72.72 a barrel. Both measures closed at their lowest since September 9.

“Markets look to be ahead of the risk even though we are not even close to understanding how bad this new variant might be,” Phil Flynn, analyst at Price Futures Group, said.

Iron ore dropped back below US$100 a tonne as Asian markets turned lower. The spot price for ore landed in China fell US$3.45 or 3.4 per cent to US$96.65 a tonne.

BHP‘s US-listed stock dropped 1.89 per cent. Its UK-listed stock shed 2.39 per cent. Rio Tinto gave up 2.23 per cent in the US and 2.69 per cent in the UK.

Gold attracted a flurry of initial haven buying, but gave up most of its gains by Friday’s settlement. Metal for December delivery settled US$1.20 or 0.1 per cent ahead at US$1,785.50 an ounce after trading as high as US$1,816.30. The NYSE Arca Gold Bugs Index eased 0.86 per cent.

Industrial metals sold off on demand fears. Copper sank 17.5 US cents or 3.9 per cent on Comex to US$4.28 a pound.

“The market is in risk-off mode,” Amelia Fu, Head of Commodity Market Strategy at Bank of China International, said.

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