Stocks see worst two day loss in 14 months on Omicron uncertainty and hawkish Fed

  • 02 December, 2021
  • 12:11 pm EET

The first Omicron case identified in the United States kicked selling into high gear on Wall Street yesterday.

Stocks began the previous session sharply higher, but started to lose gains once Federal Reserve Chairman Jerome Powell reiterated that a faster Fed taper will be discussed at the next meeting.

The report of an Omicron variant case in California pushed stocks down sharply into the close.

The S&P (SP500) has now seen its biggest two-day loss in 14 months, off a little more than 3%. Tech stocks have been particularly weak.

This morning, S&P (SPX), Dow (INDU) and Nasdaq 100  futures point to a slightly higher open.

“In terms of developments about Omicron, we’re still in a waiting game for some concrete stats, but there was positive news early on from the World Health Organization’s chief scientist, who said that they think vaccines ‘will still protect against severe disease as they have against the other variants,'” Deutsche Bank rates strategist Jim Reid says. “On the other hand, there was further negative news out of South Africa, as the country reported 8,561 infections over the previous day, with a positivity rate of 16.5%.”

Growth takes it on the chin

The Nasdaq Composite has fared the worst among the major averages in this selloff, down 3.3% in the last two sessions.

One reason for the extreme market reaction to the report of one case, when many were already assuming the variant would show up in the U.S. eventually, is the run stocks have been on this year.

Stocks currently have very high valuations and investors may have been looking for a trigger for profit-taking.

When you compare the market reaction to that of other COVID waves and the Delta variant, what’s different this time is that there was not a flight to Big Tech stocks, Florence Barjou, CIO at Lyxor Asset Management, said on Bloomberg.

“This is really a growth-based selloff, which is why it looks a little bit like panic,” Barjou says. “If we do get better news (on Omicron) we think it looks more like an entry point.”

JPMorgan strategist Marko Kolanovic goes a step further and posits that Omicron could be the highly-transmissible yet milder variant that crowds out the more severe variants.

“As such, we view the recent selloff in these segments as an opportunity to buy the dip in cyclicals, commodities and reopening themes, and to position for higher bond yields and steepening,” he says.

Fed Factor:

Also weighing on equities, especially growth stocks, is the presence of a newly-hawkish Fed chief.

Rather than walking back comments about a faster tapering of asset purchases that hit Wall Street on Tuesday, Powell reiterated that it’s time to discuss removing accommodation.

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner,” he said on Capitol Hill. “I expect that we will discuss that at our upcoming meeting.”

When Omicron was first identified, markets pushed out the first Fed rate hike to December 2022, but have now returned to pricing in liftoff for June next year.

Kinsale Trading says the Fed is getting ready to make a move that will be a “bearish gamechanger.”


Kim Khan- Seeking Alpha

Reliable Trading since 2012