Omicron: new wave of queasiness hits the markets

It’s been another traumatic day for investors as warning bells are sounded over the effectiveness of current vaccines against the new Covid variant, says Graeme Evans.

Respite for investors after Friday's pummelling has been short-lived after popular stocks including Lloyds Banking Group (LSE:LLOY), Rolls-Royce (LSE:RR.), AstraZeneca (LSE:AZN) sustained more losses today.

The buy-the-dip trends seen on Monday enabled the FTSE 100 index to recoup about a quarter of Friday's 3.6% slump, but hopes for a sustained recovery were immediately derailed by comments overnight from the boss of vaccine maker Moderna (NASDAQ:MRNA).

Stéphane Bancel warned that vaccines are likely to be less effective against the Omicron variant, and that it could take months for newer versions to be rolled out at sufficient scale. His comments to the Financial Times triggered another flight from risk, as investors increasingly worry that global economies are facing a fresh wave of Covid-19 restrictions.

The FTSE 100 index fell 1.5% to below 7,000 at one point before settling 55 points lower at 7,055 at lunchtime. Oil giants BP (LSE:BP.) and Royal Dutch Shell (LSE:RDSB) were among those more than 2% cheaper after Brent crude retreated towards $70 a barrel.

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The oil price had been above $85 a barrel only a month ago, with markets certain that UK interest rates will rise before the year is out to address inflationary pressures. Now, though, the Bank of England is expected to hold fire for a second month in a row when it meets next week.

That’s a decision that will prolong the margin squeeze frustrating Lloyds investors. The lender fell to as low as 45.5p earlier today before recovering to half a percent cheaper at 46.56p. That's down 6% since Thursday evening, albeit better than 42.3p in September.

The decline for Lloyds shares still compares favourably to the hammering experienced by travel and leisure-focused stocks since the emergence of the Omicron variant in southern Africa.

Casualties have included Rolls-Royce (LSE:RR.), whose shares were recently above 145p for the first time this year after the re-opening of transatlantic routes boosted the outlook for engine flying hours.

It has fallen 13% since Friday to stand at 122.12p, although it had been as low as 118p earlier in today's session. British Airways owner IAG (LSE:IAG) has been the biggest faller in the FTSE 350 index, having declined 17% to 127.6p across the past three sessions

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Upper Crust owner SSP (LSE:SSPG), cruise ship operator Carnival (LSE:CCL), Premier Inn chain Whitbread (LSE:WTB) and GKN owner Melrose Industries (LSE:MRO) are also on a 15-strong list of stocks down by 10% or more. Many of these companies are in the sights of bargain hunters, with more than three-quarters of trades by interactive investor customers in IAG, Lloyds and Rolls-Royce being to buy the shares.

Earlier today, Morgan Stanley's travel and leisure team told clients that it favoured companies exposed to domestic rather than international demand, and with strong balance sheets.

They said Whitbread, SSP and Flutter Entertainment (LSE:FLTR) looked relatively oversold since the Omicron news, while they are also positive on catering giant Compass (LSE:CPG), Ladbrokes owner Entain (LSE:ENT) and Mitchells & Butlers (LSE:MAB).

Prior to today's developments, most professional market participants had sounded an optimistic tone after a 1,500-strong poll by Deutsche Bank found that just 10% thought the Omicron variant would still be the biggest topic in financial markets by the end of the year.

Some 30% believed it will largely be forgotten about, while the other 60% thought it would still be an issue but only of moderate importance. Those views may already be changing, however, after today's latest blow to sentiment caused by the comments from the Moderna boss.

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Deutsche Bank markets commentator Jim Reid warned: “If our respondents are a fair reflection of broader market sentiment, then it points to some big downside risks ahead if we get notable bad news on the variant.”

Information is still being gathered on the new strain, but if the Moderna analysis is correct there are likely to be consequences for earnings expectations at AstraZeneca. The pharmaceuticals giant recently announced a plan to move towards “modest profitability” on new orders of its Covid-19 vaccine, having delivered 1.5 billion doses at cost price. Shares fell 53p to 8, 313p, which compares with 9,400p just over a fortnight ago.