‘Omicron’s in the rear-view mirror’

After spooking financial markets and swinging the pendulum from greed to fear once again, the Omicron variant of the coronavirus crept into Pakistan as well just at the end of last year. Yet even as the National Command and Operations Centre (NCOC) warned about a serious incoming wave in the country and the variant broke all sorts of records across the world, including breaching the one million per day barrier in the United States, international markets began the new year with a very forceful dismissal of Omicron as a threat serious enough to derail the global recovery.

Europe set the pace on Monday as stocks gained and bond prices fell, pushing up yields. And the American trading session confirmed it the following day as the dollar rose to its highest level against the yen in five years. The yen is a safe haven currency and rises whenever a risk-off environment grips the market. The dollar’s gains were also helped by a rise in US treasury yields, which shows investors are pricing in a Fed rate hike sooner rather than later; perhaps in March instead of earlier hopes of sometime around May.

The dollar-yen cross is the most tightly correlated G10 pair to US treasury yields, in addition to being the market’s go-to risk-off trade, which explains why its strong rise is being seen as the market’s new-year verdict on Omicron. The typically risk-sensitive Aussie dollar (AUD) also rose, even though hospitalisation stats in New South Wales broke earlier delta wave records. The New Zealand dollar (NZD) inched up as well and the British pound stayed firm with the Bank of England’s (BoE’s) December rate rise surprise proving to be the right decision and PM Boris Johnson dismissing Omicron as “plainly milder” than other variants.

And oil is rebounding very strongly. Opec expected oil oversupply in Q1 and Q2 of 2022 in light of what happened towards the end of Q4 of 2021. But since the kind of demand destruction it was expecting did not take place precisely because Omicron did not turn out to be as deadly as initially expected, its numbers are now pointing to deficits in both quarters. Brent futures rose almost two-and-a-half percent in the first two trading days of the week and Opec+ decided to stick with their planned increase for February, signalling further upside. And, never ones to miss the best time to step onto a bull ride, portfolio managers have already started rebuilding long positions in the oil market. Data published by regulators and exchanges shows that hedge funds purchased 70 million barrels in the six most important petroleum futures and options contracts over the two most recent weeks, after selling 327 million barrels over the previous 10 weeks. That’s a sure buy call for at least a quarter if ever there was one.

The sell-off in treasures, spike in risk currencies especially USD/JPY, and especially the jump in oil were triggered primarily by the finding that while Omicron has raised the volume of infections, deaths have fallen about three percent over the last couple of weeks. The new thinking in the market, aptly captured in a recent Wall Street Journal headline, is that ‘Omicron variant may end up saving lives’. That’s because a fast moving but less lethal virus could well be just what the doctor ordered to push everybody towards herd immunity.

The main problem now, if Mr Market has read Omicron right, is that demand will not decrease but increase, which means supply chains will come under strain all over again and push prices up even more. That’s good news and bad news for countries like Pakistan, where even the PM’s confident tweet about inflation coming down in the next few months, on the back of likely depressed commodity prices, banked on nothing more than Omicron taking the wind out of the recovery and keeping oil, especially, subdued. Now the likelihood of more deaths and lockdowns might well have been ruled out, but there’ll be hell to pay if prices rise too much.

Markets are often the best barometer of monumental global events because when Big Money comes to play, it checks all angles. And if this is just one more of those times when it is precisely so, then in the words of Colin Asher, senior economist at giant global bank Mizuho, as quoted by The Guardian, “As far as markets are concerned, Omicron is in the rear-view mirror”.

Copyright Business Recorder, 2021