Wall Street joins the global equity slump; S&P 500 down 1.8%
A trader wearing a face mask works in the New York Stock Exchange trading floor (Reuters)
NEW YORK: Wall Street joins a global financial market meltdown on Monday amid concerns about the severity of the omicron variant, inflation and other forces that will hit the economy.
The S&P 500 was down 1.8% at midday, following similar declines in Europe and Asia. Inventories of oil producers helped pave the way down after the price of U.S. crude fell 6% over fears the latest variant of the coronavirus could lead factories, planes and drivers to use less fuel .
Omicron may be the scariest force hitting the markets, but it’s not the only one. A $ 2 trillion spending program proposed by the US government suffered a fatal blow over the weekend when an influential senator said he could not back it. Markets also continue to absorb the Federal Reserve’s momentous decision to cut back on aid to the economy more quickly due to rising inflation.
They all combined to bring the Dow Jones Industrial Average down 649 points, or 1.8 percent, to 34,716 at 11:12 a.m. Eastern time. The Nasdaq composite fell 1.8 percent, while the German DAX fell 1.9 percent and Japan’s Nikkei 225 fell 2.1 percent.
“Omicron threatens to be the Grinch to steal Christmas,” Mizuho Bank’s Vishnu Varathan said in a report. The market “prefers security to unpleasant surprises”. With the upsurge in Covid-19 cases, government leaders around the world are weighing the return of restrictions on business and social interactions as many people seem fed up.
The Dutch government began a strict national lockdown on Sunday, while a British official said on Monday it could not guarantee that new restrictions would not be announced this week. The Natural History Museum, one of London’s top attractions, said on Monday it was closing for a week due to “a lack of indoor staff.”
In the United States, President Joe Biden will announce the new measures he is taking on Tuesday, “while issuing a stern warning of what winter will be like for Americans who choose to remain unvaccinated,” the attache said. press release from the White House over the weekend.
Devon Energy fell 6.9% for one of the S&P 500’s biggest losses, topping a long list of losing oil stocks. Commodity producers and financial firms also fell sharply amid omicron concerns. Steelmaker Nucor lost 5.7% and Synchrony Financial, which offers branded credit cards and other financial products, lost 5.9%. Omicron’s final impact on the economy is unclear.
In addition to weakening it by imposing restrictions on businesses, another feared outcome is that it could push inflation even higher. If this results in closures of ports, factories and other key points in long global supply chains leading to customers, already tangled operations could escalate.
These problems helped push consumer prices up 6.8% in November from the previous year, the fastest inflation in nearly four decades.
But some economists argue that omicron could have the opposite effect: If the variant causes blockages or causes consumers to stay at home, economic activity could slow, and with it, the strong demand that has overwhelmed retail chains. supply and pushes up consumer prices.
In the worst-case scenario, the economy would slow down without relieving the already built-in inflation.
“The rapidly spreading Omicron variant appears likely to lead to transient winter cold,” Oxford Economics economists Lydia Boussour and Gregory Daco wrote in a research report last week. They say the Federal Reserve could be faced with a “delicate” task of figuring out how to cope with an economic slowdown that coincides with high inflation.
The two-year Treasury yield fell to 0.60% from 0.66% on Friday night. This is a sharp turnaround from its sharp rise in recent months, based on expectations that the Fed may start raising short-term interest rates in 2022 to keep inflation under control.
The 10-year Treasury yield slipped to 1.38% from 1.40% on Friday night.
Given high inflation that has lasted longer than expected, the Fed last week targeted an early end of its program to buy billions of dollars of bonds each month, which aims to keep interest rates down. long term low. Many of its members have also said they expect the Fed to hike rates in the short term, which would have a bigger impact, three times in 2022.
Ultra-low rates designed by central banks around the world have been one of the main reasons stocks have skyrocketed in this mostly golden year for investors.
Despite recent concerns about the omicron, the S&P 500 has jumped over 20% this year with relatively few sharp price swings. Almost every time the stocks slumped a bit, bargain hunters would come in to drive the prices back to record highs.
It has been one of the best years of the past century for US stocks when it comes to risk-adjusted returns, according to Goldman Sachs. And the S&P 500 is still less than 4% of its record set two Fridays.
In Asia, the Chinese central bank could be heading in the opposite direction of the Fed and other central banks. It reduced its key interest rate, reducing its one-year prime rate to 0.05%, while leaving the five-year rate and its main policy rate unchanged.
The reduction is a “small step towards easing” monetary policy without changing efforts to reduce real estate debt, Macquarie’s Larry Hu and Xinyu Ji said in a report. Beijing’s use of multiple interest rates “is confusing, drastically reducing the signal” if only one is cut, they said.