European stocks drop as concerns over Omicron variant flare up

European and Asian stock markets fell on Tuesday, while investors parked money in high-grade government bonds, as traders’ attention was dominated by concerns over the Omicron coronavirus variant.

The regional Stoxx 600 share index, which had rallied on Monday along with Wall Street stocks to reflect a burst of optimism that market volatility sparked by Omicron would turn out to be a buying opportunity, fell around 1.3 per cent with the UK’s FTSE 100, Germany’s Dax and France’s Cac 40 all down by around the same margin.

Hong Kong’s Hang Seng index fell 1.6 per cent and Tokyo’s Nikkei 225 lost 1.6 per cent, while futures tracking Wall Street’s S&P 500 index fell more than 1 per cent in early European dealings.

Brent crude, the international oil benchmark, lost as much 3 per cent to $71.27 a barrel, hitting it lowest level in almost three months.

The moves came after Stéphane Bancel, chief executive of vaccine maker Moderna, told the Financial Times that existing vaccines will be much less effective at tackling Omicron than earlier strains of coronavirus. He also warned pharmaceutical companies would take months to manufacture new variant-specific jabs at scale.

Earlier in the session, Hong Kong banned non-resident arrivals from 13 countries in response to Omicron and Japan confirmed its first case of the variant, which was first detected in southern African and is now present in the UK, much of Europe and Canada.

Investors widely expect markets to remain volatile as more information emerges about Omicron and the capacity of governments and existing vaccine programmes to contain it. Wall Street’s Vix index, a measure of expected volatility in the stock market, jumped to 26 on Tuesday from 23 the previous day — leaving it further above its long-run average of 20.

The US has not detected any cases of the variant so far, although President Joe Biden has predicted it will emerge there while also ruling out more lockdowns to prevent its spread.

“The US is always a big catalyst for market moves, so the magnitude of market reactions may still increase if we start seeing cases of this variant in the US,” said Tancredi Cordero, founder and chief executive of investment advisory boutique Kuros Associates.

“Markets also came into this from a place of complacency,” he added, noting that the S&P 500 and the Stoxx had hit record highs earlier this month despite the US Federal Reserve announcing the start of reductions to its $120bn a month monetary stimulus and high levels of global inflation.

The yield on the 10-year Treasury bond dropped by 0.07 percentage points to 1.46 per cent as the price of the debt rose. Bond markets have faced a jolt of volatility in recent days as traders assess the potential impact of the new variant on economic growth and central banks’ policies.

The dollar index, which measures the US currency against six others, fell 0.5 per cent as traders eased back on bets on how quickly the Federal Reserve will raise interest rates next year.

In prepared remarks ahead of an appearance before Congress later on Tuesday, Fed chair Jay Powell said rising Covid-19 cases and the Omicron variant “pose downside risks to employment and economic activity and increased uncertainty for inflation.”