SINGAPORE – Markets are expected to be volatile as experts gauge the impact of the Omicron virus variant in terms of transmissibility, severity and vaccine efficacy in the coming weeks.

“We will only get better clarity in a few weeks’ time, when the World Health Organisation, scientists and vaccine makers delve deeper into the latest variant to assess how infectious and lethal it is,” Mr Vasu Menon, executive director of investment strategy at OCBC Bank, told The Straits Times.

Already, stock prices have been negatively hit by volatility and price weakness as investors weigh the potential for lockdowns or tighter restrictions in response to the new variant. The Straits Times Index (STI) saw its largest single-day decline in a year on Tuesday (Nov 30), falling 2.5 per cent to 3,041.29.

But the uncertainty has benefited assets such as gold, which is often seen as a safe haven for investors, as well as currencies such as the Japanese yen and Swiss franc.

The price of gold jumped above US$1,800 per ounce last Friday, when news of Omicron first surfaced, while the US dollar weakened to 113.50 against the yen and to 0.9250 against the franc.

In addition, concerns about the potential negative impact Omicron might have on the economy could be supportive for bond prices. “This is especially so for investment-grade bonds, which are seen as safer than riskier high yield bonds,” said Mr Menon.

On the other hand, cryptocurrencies like Bitcoin and Ether have fallen. This is because Bitcoin is seen as a risky asset and is driven by speculation, said Mr Menon.

“So when investors turn more risk averse, it can impact risky propositions like cryptos negatively.”

Until the authorities are certain about Omicron though, OCBC reckons the current pullback in stock prices could present opportunities for those with a strong risk appetite.

Mr Menon said: “There are no strong reasons for investors to panic and bail out from the markets. Governments and policymakers are better prepared now after battling Covid-19 for the past 20 months.”

Analysts from DBS Bank are still expecting two rounds of rate hikes by the United States Federal Reserve next year, as well as the Singdollar potentially weakening to 1.39 against the US dollar.

With the US Federal Reserve on course to raise interest rates, UOB is expecting the US dollar to regain its strength against other currencies.

“We are positive on the US dollar going forward and expect more strength as the Fed starts to taper its bond buying and hike rates in the months to come,” said Mr Heng Koon How, head of markets strategy at UOB.

These would all be negative drivers against gold, however. While “gold can also draw strength from safe haven demand when investor sentiment is uncertain, we are neutral on gold as the upside potential is limited given imminent Fed tapering and monetary policy normalisation”, Mr Heng said.

Meanwhile, DBS is expecting further volatility in stocks directly related to the opening up of the economy, such as Singapore Airlines, Genting Singapore and Sats. Until a better understanding of Omicron is made available, it expects the STI to find support between 3,040 and 3,100 points.

“We think the key information to watch is the effectiveness of current vaccines in preventing hospitalisations. If the effectiveness against Omicron is high or similar to Delta, equity markets should snap back quickly to pre-Omicron levels,” DBS analysts said.

 

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