European stocks rally after Omicron-induced wobble

European stocks bounced back on Tuesday after steep losses in the previous session, although investors remained on edge over the prospect of fresh travel restrictions to combat the fast-spreading Omicron variant.

The regional Stoxx 600 index rallied 1.2 per cent by early afternoon, reversing Monday’s 1.4 per cent decline. London’s FTSE 100 rose 1 per cent, while Germany’s Dax and France’s Cac 40 both advanced by about 1.2 per cent. Meanwhile, S&P 500 futures rose 1 per cent, following a 1.1 per cent drop for Wall Street’s benchmark stock index on Monday.

Oil prices also rose after falling in the previous session. Brent, the international benchmark, was up 1.4 per cent on Tuesday at $72.50 a barrel, while US benchmark West Texas Intermediate was up 1.4 per cent to $69.60.

European wholesale gas prices continued their seemingly inexorable rise, with futures contracts linked to TTF, the region’s benchmark contract, gaining a further 16.3 per cent to hit a record €169.50 per megawatt hour.

“It comes as temperatures have continued to decline heading into the European winter and we also got the news that Gazprom hadn’t booked any extra capacity in January for gas flowing through Ukraine,” said analysts at Deutsche Bank. “That’s an important story heading through the winter, with implications for European growth, and one that will have investors closely following the weather forecasts to work out what might happen.”

Announcements on Monday from vaccine manufacturers and regulators offered investors both hope and cause for caution. The European Medicines Agency told the Financial Times that early evidence suggested a “clear” drop in the effectiveness of existing jabs against the Omicron variant. Hours later, Moderna said a half dose of its Covid-19 vaccine elicited a robust antibody response.

In addition to the human toll, the spread of the highly mutated variant was likely to add to inflationary pressures by exacerbating existing supply chain issues, according to Emmanuel Cau, a strategist at Barclays.

But if governments were to reimpose nationwide lockdowns — a strategy the Netherlands has already employed — “it would be a different, deflationary, story” because it would heavily knock consumer demand, he added.

Major central banks last week adopted a more aggressive stance on tackling elevated inflation and Cau argued that their pivot “now means they have more room to act . . . if they have to” step in with extra pandemic stimulus. However, most economists expect policymakers to continue pulling back on crisis-era measures despite the new variant.

Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note that he expected markets to “look through Omicron concerns”.

“While mindful of risks around . . . variants and inflation, we keep a positive outlook on stocks for the start of 2022,” he added.

Countries, including Germany and France, have tightened travel restrictions, but UK Prime Minister Boris Johnson has so far opted not to introduce Christmas curbs despite saying on Monday that the Covid-19 situation was “urgent”.

The Omicron variant is now dominant in the US, according to the Centers for Disease Control and Prevention, accounting for 73 per cent of sequenced cases, up from 13 per cent in the previous week.

In Asia, Hong Kong’s Hang Seng traded 1 per cent higher and Tokyo’s Nikkei 225 added 2.1 per cent.