Equities and oil prices slump on Omicron and growth fears

Carolyn Cohn and Wayne Cole, Reuters

Posted at Dec 20 2021 06:02 PM

An oil production site run by Civitas Resources is seen near Broomfield, Colorado, U.S, December 2, 2021. Picture taken December 2, 2021. REUTERS/Liz Hampton
An oil production site run by Civitas Resources is seen near Broomfield, Colorado, U.S, December 2, 2021. Picture taken December 2, 2021. REUTERS/Liz Hampton

LONDON - Stocks fell and oil prices slid more than 3 percent on Monday as surging Omicron COVID-19 cases triggered tighter curbs in Europe and US growth prospects dimmed after a $1.75 trillion domestic investment bill suffered a potentially fatal blow.

The spread of the Omicron variant saw the Netherlands go into lockdown on Sunday and put pressure on others to follow, though the United States seemed set to remain open.

S&P and Nasdaq futures fell 1.3 percent, pointing to a lower Wall Street open, after US Senator Joe Manchin, a moderate Democrat who is key to President Joe Biden's hopes of passing the investment bill, said on Sunday he would not support the package.

"Omicron ... remains one of the biggest issues for markets right now and has significantly clouded the outlook moving into year-end," Deutsche Bank analysts said in a note, adding that Manchin's stance "marks a significant blow for President Biden’s economic agenda".

Goldman Sachs cut its US real GDP forecast for the first quarter of 2022 to 2 percent from 3 percent previously, and marginally reduced forecasts for the second and third quarters.

European and UK stocks hit two-week lows, dropping 1.9 percent and 1.8 percent respectively.

MSCI's index of Asia-Pacific shares outside Japan fell 1.8 percent to its lowest in a year and the world stocks index hit its lowest in nearly two weeks.

Emerging market stocks also hit their lowest in a year.

Beijing lightened the mood a little by cutting one-year loan rates for the first time in 20 months, though some had hoped for an easing in five-year rates as well.

The timing of the cut ahead of the Jan 1 interest rate resetting date for corporate loans was positive for corporate borrowers, JPMorgan analysts said.

Chinese blue chips still fell 1.5 percent, while Japan's Nikkei dropped 2.1 percent.

Oil prices swung lower amid concerns the spread of the Omicron variant would crimp demand for fuel and signs of improving supply.

Brent fell 3.2 percent to $71.16 a barrel, while US crude lost 3.6 percent to $68.30 per barrel.

While coronavirus restrictions cloud the outlook for economic growth, they also risk keeping inflation elevated, prompting central banks to consider raising rates.

It was notable that Federal Reserve officials were openly talking of hiking rates as soon as March and of starting to run down the central bank's balance sheet in mid-2022.

That is earlier than implied by futures, which had been well ahead of Fed intentions until now. The market has only priced in a 40 percent chance of a hike in March, with June still the favoured month for lift off.

The signals from the Fed are a major reason why long-dated Treasury yields fell last week as the short-end rose. That left the two-10 year curve near its flattest since late 2020, reflecting the risk that tighter policy will lead to recession.

Yields on US 10-year notes were down at 1.37 percent, well below their 2021 top of 1.776 percent.

Ten-year German government bond yields fell to their lowest in nearly two weeks and were trading at -0.394 percent.

The Fed's hints of faster tightening, combined with safe-haven flows, underpinned the US dollar index near its best for the year at 96.555, following a 0.7 percent jump on Friday.

The euro rose 0.22 percent to $1.1265, having shed 0.8 percent on Friday to threaten its low for the year. The dollar was at 113.45 against the yen, down 0.2 percent.

Sterling fell 0.25 percent to $1.321 as Omicron worries erased all the gains made following the Bank of England's surprise rate rise last week.

The Turkish lira hit a record low and was trading at 17.49 to the dollar on concerns over President Tayyip Erdogan's low interest rates economic policy and soaring inflation.

Gold gained 0.16 percent to $1,801 an ounce, having broken a five-week losing streak last week as equities slipped.

(Editing by Sam Holmes, Kenneth Maxwell and Philippa Fletcher)