The UK market is seeing something of a relief rally on Monday as investors digest information about the new Covid variant.
The global economic recovery is set for an unwelcome detour as investors assess the potential impact of the new Omicron variant.
The volatility index has spiked sharply higher, with the main indices seeing a widespread wave of selling as the nemesis of markets, uncertainty, has returned. With little known at this stage about the new variant in terms of vaccine resistance and its level of contagion, many countries have taken swift action in closing their borders in an effort to prevent another global situation.
One such example of the potential concern has been the oil price, which fell sharply lower in anticipation of slowing demand. Some subsequent recovery is currently being seen and, although the recent losses have not been recouped, the oil price nonetheless remains ahead by 46% in the year to date.
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There may be some lessening of volatility as more detail is released, and in any event the current malaise should delay the immediate pressure on monetary tightening as central banks assess the potential economic damage from the new strain.
Even among the uncertainty, markets have made sufficient progress still to stand comfortably in positive territory, with the Dow Jones having added 14%, the S&P 500 22.3% and the Nasdaq 20% in the year to date.
In the meantime, the immediate pressure remains, although the UK market is seeing something of a relief rally despite a weak session in Asian markets. The fluidity of the situation as knowledge of the Omicron variant increases over the coming weeks will, however, keep investors on high alert.
Any renewed pressure on the FTSE 100 is likely to come from the very nature of its constituents. Quite apart from the dominant sectors such as the oils, miners and banks, travel and leisure companies have also seen their recent tentative recoveries derailed as investors err on the side of caution.
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Investors who had been hoping for some air to be let out of the tyres are trying to read this new middle ground and whether it is now appropriate to be buying on the dip. In the year to date, the FTSE 100 is now ahead by 10% and the FTSE 250 by 11%. However, with heightened uncertainty currently the order of the day, a sustained relief rally is too early to call.
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