The emergence of what could be a powerful new variant of the novel coronavirus has rattled financial markets around the world, with fears of losing hard-fought gains in the fight against the pandemic taking hold.
Following cues from sharp selloffs earlier in the day in Asia and Europe, North American stock benchmarks headed downward Friday.
The Toronto Stock Exchange’s S&P/TSX Composite Index closed down 487.28 points, or 2.25 per cent, at 21,125.90.
The Dow Jones Industrial Average lost 2.53 per cent, falling to 34,899.34 in its largest percentage drop in more than a year. The S&P 500 lost 2.27 per cent, its worst one-day drop since Feb. 25, and the Nasdaq Composite dropped 2.23 per cent, its biggest one-day rout in two months.
U.S. markets closed early Friday after being closed on Thursday for the Thanksgiving holiday.
Amid a surge in COVID-19 cases throughout Europe, a number of countries have banned flights from southern Africa, where a variant of concern that the World Health Organization has named Omicron has started to spread.
“The fear is that this variant takes a bite out of the economic growth, if we see further lockdowns and reduced travel,” said Craig Jerusalim, senior portfolio manager at CIBC Asset Management. “That’s why you’re seeing such a sharp reaction and money moving back to the sidelines.”
The same companies that have been stock-market casualties at other points during the pandemic – including travel-related firms, the energy sector, stocks most closely aligned with economic growth – were dealt the greatest blows.
In Canada, the energy sector was the focus of the most intense selling pressure, with stocks such as Suncor Energy Inc. losing 6.5 per cent on the day and Canadian Natural Resources Ltd. down 5.4 per cent.
Overall, it’s the same type of financial tremour experienced in other moments of panic over the past two years, but it was the first for several months.
Despite a global death count of more than five million and counting, financial markets have built up resilience amid a powerful economic resurgence. Canadian and U.S. benchmark stock indexes have gained more than 20 per cent so far this year.
Friday’s selloff serves as a reminder to investors that the pandemic, with its associated financial risks, is still active, Bank of Montreal chief economist Doug Porter said in a research note. “At the least, it is likely to continue throwing sand in the gears of the global economy in 2022, restraining the recovery, keeping kinks in the supply chain, and possibly cooling the most hawkish central banks,” Mr. Porter said.
The Omicron variant, which experts say could be more transmissible and better able to evade immunity, arrives at a fragile time: While major economies are growing quickly, they have also been hit by the highest inflation rates in decades, in part because of overworked supply chains.
If the new variant were to spread to China, which moves quickly to stamp out outbreaks with heavy restrictions, that could worsen supply-chain disruptions. “That would mean localized lockdowns as outbreaks emerge, tighter restrictions on regional travel and a greater likelihood of port shutdowns,” Neil Shearing, group chief economist at Capital Economics, said in a note to clients.
“Supply chains are already stretched,” he added. “A virus-related surge in goods spending, or port closures, would exacerbate existing supply strains and add upward pressure to goods inflation.”
Beyond the threat posed by the new variant, parts of Europe and the U.S. are already dealing with another surge of infections. Belgium and the Netherlands announced tighter public-health measures Friday, albeit not as restrictive as past iterations.
“Premature declarations of victory in countries like Austria and Germany are helping to generate waves of illness,” said Avery Shenfeld, chief economist at CIBC Capital Markets, in a research note. “That could bring back sterner health measures that might be more disruptive to economic activity than those that were abandoned.”
At this point, however, most investors are keenly aware that financial markets have a powerful backstop in the form of central bank stimulus, Mr. Jerusalim said. The emergence of the Omicron variant has already pushed back the expected timeline for the U.S. Federal Reserve to start hiking interest rates.
“Central banks have seen this game before and they know the playbook,” Mr. Jerusalim said.
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