Could the Omicron variant cause a larger FTSE 100 crash?

Stock markets across the world were rattled yesterday as the discovery of a new Covid strain in South Africa stoked fears over the global economic recovery. The FTSE 100, comprised of the UK’s 100 largest companies by market cap, fell 3.64%, ending the day down 266 points to 7,044. £65 billion was wiped off the index.

This new Omicron variant could send the global economy back into lockdown. It’s already spread to Belgium, Israel, and Hong Kong. Or it might emulate the irrelevance of its older brother, the Beta variant, which was also discovered in South Africa, nearly a year ago.

The Omicron variant

To establish the level of risk, it’s important to understand what makes the Omicron variant different. To start with, this new variant has 50 new mutations. Concerningly, 32 of these are in its ‘spike protein,’ which is the part of the virus attacked by antibodies that are produced by the vaccines. And currently, scientists don’t know how effective current vaccinations will be against this new strain.

Furthermore, South African scientists from the National Institute for Communicable Diseases say that early evidence is that it can spread more easily than previous strains. This viewpoint is also held by the World Health Organisation’s Maria Van Kerkhove, who said that ‘some of these mutations have worrying characteristics,’ making the strain more likely to reinfect people who have already had the virus.

The UK has added six African countries, including South Africa, to its red list. The European Union and the USA have taken similar actions. Travellers from these countries must now quarantine upon arrival, with UK Health Secretary Sajid Javid saying it is a ‘huge international concern.’ But Sharon Peacock, Director of the Covid-19 Genomics UK Consortium said that ‘once a new variant emerges…it can be very difficult to stop it going into a country unless you have very stringent lockdown rules.’ In addition, the European Centre for Disease Control said that it was extremely likely that the variant would spread around the EU.

And Vaccine company BioNTech said it would take up to 100 days to produce and ship an updated vaccine if necessary. This means there would be no effective vaccine over the winter period when people are most likely to become infected. But also, already hard-pressed FTSE 100 businesses would lose out on much-needed income over the crucial Christmas trading period.

With Austria already in lockdown, the Netherlands PM Mark Rutte said that ‘from Sunday the whole of the Netherlands is effectively closed between 5 pm and 5 am.’ Slovakia has followed suit, Belgium is in a three-week ‘lockdown light’ and Germany was already considering new measures before the Omicron variant emerged.

Where next for the FTSE 100?

While stock markets around the world all fell, the FTSE 100’s 3.64% drop made it one of the hardest hit. Travel stocks were the biggest losers. IAG, owner of the British Airways and Iberia brands saw its share price drop nearly 15% to $131, while Rolls-Royce fell 11% to $121. Both of their share prices have already been hurting since the dawn of the pandemic, but the new variant could send restrictions on global travel back into overdrive.

Hospitality companies were also badly affected. These included InterContinental Hotels Group, Whitbread (owner of Premier Inn and Beefeater) and the largest contract foodservice company in the world, Compass Group. They all saw falls of between 8-9%, as nervous investors know that hospitality would be the next sector to be locked down after travel.

Meanwhile, shares in the big four banks — Lloyds, HSBC, Barclays, and NatWest — all fell about 7%, as the new variant makes the Bank of England more likely to delay raising interest rates. Banks generate more income from loans, credit cards and mortgages when rates are higher. However, the rest of the FTSE 100 would fall as debt-fuelled growth becomes more expensive.

A rate rise in December seemed likely, with Bank of England Chief Economist Huw Pill saying yesterday ‘the ground has been prepared for policy action,’ before later describing the Omicron variant as a 'punch in the face.' This new variant could tip the scales in favour of inaction. Moreover, Brent Crude crashed 11% to 73.18 dollars per barrel. A new lockdown could see the global demand for oil collapse again and send its price back to negative territory. But this should also alleviate inflation, further strengthening the argument against raising interest rates.

There were some winners though. Ocado rose 4.5% as the prospect of another lockdown could see its online food offering skyrocket once more. B&M European Value Retail rose over 1% as its affordable outdoor and indoor ranges could see higher sales in lockdown periods. Croda International also rose above 1%; an unsurprising move as it supplies chemicals to vaccine manufacturers, including Pfizer and BioNTech.

And the FTSE 100 is still up 10.6% over the past year, despite the dip yesterday. It’s worth noting that the UK inflation rate is at a decade-high of 4.2%, while current accounts pay less than 1% in interest. Long-term investors in the index have still done well. Of course, past success is no future guarantee.

However, it’s no secret that the markets hate uncertainty. And the long-term effect of the Omicron variant is definitely uncertain. Investors will remember the FTSE 100 crash last year, when the index fell 30% in the space of a month, from 7,404 points on 21 February, to 5,191 points on 20 March.

While the index has recovered much of this lost ground, the recovery has been encouraged by low interest rates, quantitative easing, furlough, and business support. These economic buffers might no longer be affordable, even if further lockdowns are deemed necessary. If the Omicron variant forces PM Boris Johnson to send the UK back into lockdown, a larger FTSE 100 crash is possible. Of course, the index could also rally sharply, if it becomes clear that the threat is overexaggerated.

For investors with an appetite for risk, IG offers FTSE 100 futures to trade on the ongoing market volatility.

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*Based on revenue (published financial statements, 2022).