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A “risk off” session on overseas markets points to renewed pressure on Australian stocks after omicron worries rekindled and the Federal Reserve signalled it may reduce support for the US economy faster to contain inflation.

ASX futures sank 35 points or 0.48 per cent as heavy selling resumed on US and European equity markets following Monday’s respite.

The Dow, S&P 500 and Nasdaq all shed more than 1.5 per cent. Oil fell to its heaviest monthly loss since the original pandemic sell-off. Gold and copper also declined.

Wall Street

Wall Street sank under twin blows from unexpected sources. First, a stark warning about the efficacy of existing vaccines from Moderna’s CEO forced investors to reassess the economic threat from the new omicron Covid variant. Then Fed Chair Jerome Powell surprised the market with hawkish testimony in Congress.

The S&P 500 wilted 88 points or 1.9 per cent, entirely unwinding Monday’s rebound. The Dow Jones Industrial Average slumped 652 points or 1.85 per cent. The Nasdaq Composite gave up 245 points or 1.55 per cent.

Moderna CEO Stephane Bancel threw a bucket of cold water over markets that had started to discount the dangers of the new Covid strain. Bancel told the Financial Times existing vaccines will be much less effective against omicron. He said it would take months for manufacturers to produce omicron-specific jabs at scale.

The report was published at the tail-end of yesterday’s Australian session. The impact was immediate. The ASX 200 gave up 34 points in the closing auction, slashing a pre-auction advance of 50 points to 16.   

“The stock market is laser focused on news flow tied to Omicron,” Jim Paulsen, chief investment strategist for Leuthold Group, said. “It is being rocked by news from Moderna that Omicron could invalidate our existing vaccines and necessitate a new and improved vaccine which could take months to develop.”

Moderna shares dived 4.36 per cent. Rival Regeneron fell 2.73 per cent after acknowledging its Covid antibody drug could be less effective against the new strain.

Travel stocks were back in the firing line. The S&P 500 airlines index dropped 0.59 per cent. Major cruise lines fell by at least 3 per cent. Expedia shed 3.25 per cent.

Wall Street was already under pressure when Fed Chair Powell delivered the second blow. Powell told a Senate committee the central bank should consider accelerating the wind-down of its bond-buying program. The bank is due to discuss the pace of the taper at this month’s meeting.

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases… perhaps a few months sooner,” Powell said.

The overnight action continued a volatile run since the market woke up to the new Covid strain. The Dow dived 905 points on Friday, then bounced 237 points on Monday. The VIX, or volatility index, surged 18.8 per cent overnight but fell short of Friday’s heights.

Australian outlook

The new month looks set to pick up where the old one left off. The S&P/ASX 200 has fallen for three straight months and may retest Monday’s lows if today’s sell-off gains traction.

Dip-buyers entered when the benchmark dropped below 7200 two days ago. A close below the 7185-7200 level this afternoon would be bearish.  

All 11 US sectors lost at least 0.9 per cent. The two sectors with the biggest market weighting here – materials and financials – shed 2.48 and 2.41 per cent, respectively.

A dive in rates helped cushion growth stocks. The tech sector was the pick of a rotten bunch with a loss of 0.96 per cent. The NYSE Arca Gold Bugs Index finished little changed, down 0.03 per cent.

Trading volumes hit a two-and-a-half-month high here yesterday during the end-of-the-month rebalance, but are likely to dwindle in the run-down to Christmas. The prospects for a “Santa rally” appear to depend very much on an improved newsflow.  

The September-quarter GDP report is today’s domestic wild card. Economists anticipate the economy contracted 2.7 per cent under the effects of prolonged lockdowns in NSW, Victoria and the ACT. Given the volatility of lockdown-affected data, a surprise in either direction is highly possible.

IPOs: Cosmos Exploration lists today at 12 pm AEDT. Cosmos is a copper-gold-nickel explorer with projects in NSW and WA.

Synlait Milk holds its AGM today.

The dollar was dragged lower as part of a general retreat from risk. The Aussie was lately down 0.22 per cent at 71.29 US cents.

Commodities

Oil wrapped up its worst month since March 2020 with another sharp retreat as traders factored in the potential demand hit from omicron if existing vaccines prove ineffective. Brent crude settled US$3.99 or 5.5 per cent lower at US$69.23 a barrel. The expiring January contract shed 16 per cent for the month.

“Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022 as governments prioritize health safety over reopening plans, of which there is already telltale evidence, from Australia delaying its reopening to Japan banning foreign visitors,” Louise Dickson, senior oil markets analyst at Rystad Energy, said.

Natural gas futures sank 5.9 per cent in the US to extend their November retreat to almost 16 per cent.

Iron ore has so far resisted the sell-off in other commodities. Supported by restocking from Chinese steel mills, the spot price for ore landed in China inched up 15 US cents or 0.2 per cent yesterday to US$100.10 a tonne. The most traded contract on the Dalian Commodity Exchange rose 2.4 per cent.

BHP and Rio Tinto suffered mixed fortunes in overseas trade. BHP‘s US-listed stock rallied 0.34 per cent after its UK-listed stock put on 2.35 per cent. Rio Tinto eased 0.38 per cent in the US and 0.21 per cent in the UK.

Gold gave up strong early gains amid reports of selling to cover margin calls on losing equity trades. Gold for February delivery settled US$8.70 or 0.5 per cent lower at US$1,776.50 an ounce. The yellow metal earlier traded as high as US$1,811.40 following comments from Moderna’s CEO.

Copper retested Friday’s lows. March copper dropped 1.4 per cent to US$4.28 a pound on Comex. For the month, copper lost 2 per cent.   

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