New "Omicron" COVID Variant Rattles Stock Markets

A new variant of the COVID-19 virus identified recently in Africa put a scare into most risk assets during Friday's holiday-shortened trading session.

The variant – B.1.1.529, which the World Health Organization has labeled "omicron" – was first identified in either Botswana or South Africa, according to conflicting reports, and has since been detected in Hong Kong as well.

Little is known about the virus, which South Africa fears might be responsible for a recent spike in cases, from 200 daily recently to 2,465 on Thursday. However, the WHO labeled this strain a "variant of concern" (VOC) and said Friday that "preliminary evidence suggests an increased risk of reinfection with this variant, as compared to other VOCs."

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The sudden burst of uncertainty sent markets reeling.

The Dow Jones Industrial Average finished Friday off 905 points (-2.5%), while the S&P 500 closed down by 2.3% and the Nasdaq Composite was lower by 2.2%.

"There has been a substantial market reaction, with travel-related stocks in particular having been heavily affected," Deutsche Bank Research Analyst Jonathan Jayarajan said in an early Friday note. "That comes as countries have moved to tighten restrictions, with the U.K. already adding six countries to its red list, and European Commission President von der Leyen proposing that the emergency brake be activated to stop air travel from southern Africa."

Examples of travel stocks that were hit hard Friday include Carnival (CCL, -11.0%), American Airlines (AAL, -8.8%), United Airlines (UAL, -9.6%) and Expedia (EXPE, -9.5%).

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"Other assets have also been affected, with investors moving rapidly into safe havens such as sovereign bonds, just as they move to push back their expected timing of future rate hikes from central banks as well," Jayarajan added. "Oil prices have moved sharply lower on the prospect of weaker growth and lower mobility, and West Texas Intermediate (U.S. crude oil) is back beneath $75 per barrel at the time of writing."

Even cryptocurrencies reminded markets that they too are risk assets; Bitcoin, for instance, was off 8.1% to $54,246.80.

The CBOE Volatility Index, meanwhile, shot 47.8% higher to 27.46 – a level last seen in May of this year.

And naturally, several assets that were popular during the 2020's COVID crash were en vogue Friday. COVID vaccine makers Pfizer (PFE, +6.1%) and Moderna (MRNA, +20.6%) jumped, as did popular stay-at-home plays including Zoom Communications (ZM, +5.7%) and Peloton Interactive (PTON, +5.7%).

Quick Takeaways

The omicron COVID variant certainly bears watching, as it could trigger even more worldwide shutdowns and slam the progress of economic recoveries around the globe. In turn, that could also prompt the world's central banks (including the Federal Reserve) to reconsider recent adjustments to tighten monetary policy and delay future rate hikes.

Other variants, such as the lambda and mu strains, weren't found to be any more transmissible or dangerous than the delta variant. A similar development with omicron COVID could see this downturn reverse course just as quickly.

On the other hand, lambda and mu never received the "VOC" designation, which is given to strains that the WHO says has demonstrated one or more of the following changes at "a degree of global public health significance: Increase in transmissibility or detrimental change in COVID-19 epidemiology; or increase in virulence or change in clinical disease presentation; or decrease in effectiveness of public health and social measures or available diagnostics, vaccines, therapeutics."

"The economic recovery has been quite impressive and the one thing that could knock it over completely would be a more dangerous variant," says Ryan Detrick, chief market strategist for broker-dealer LPL Financial. "Time will tell how worried we should be, but investors are selling in front of potential bad news."