Will the new Omicron strain be a black swan for markets?

The threat of the new South African variant of the coronavirus which the WHO has dubbed Omicron, and its potential partial vaccine resistance - which is still under study - is a 180-degree turn for the market.

There has been a shift from prevailing concerns about inflationary pressures and interest rates to a scenario of new confinements. The consequences for the main market variables would be cheaper oil, easing inflation, further delay in rate hikes, but with the aggravating factor of an economic recovery cut short.

The new covid variant is a new potential scenario for the economy and markets. Until there is greater certainty about the extent and aggressiveness of the latest South African variant, it will be impossible to predict its impact on the markets and the economy, but considering that they are likely to be resistant to the current vaccines - although it is not yet known to what extent - this would be a new scenario for the markets and the economy.

In a matter of hours, the outlook for the markets and the economy could be turned upside down. We would go from a scenario in which inflation was the main threat, with unstoppable oil prices (they have forced the US to announce the largest reserve release in its history) and the first-rate hikes just around the corner, to an almost radically opposite scenario. Commodity and interest rate futures are showing some hints of what could be the new scenario if the new strain of covid is confirmed to be more contagious and resistant, something that is still under investigation.

The first piece of this new scenario would be in the oil market. Brent futures (benchmark crude in Europe) and West Texas (Benchmark in the US) have fallen by more than 10%. In dollar terms, this drop means the loss of more than 8 dollars in one session, which would leave the barrel below 70 dollars with WTI. The price of natural gas, which is in the eye of the hurricane in Europe's energy crisis, is also suffering. Futures corrected by around 4% and fell below 90 euros per MWh.

The threat of a vaccine-immune variant would mean a plummeting demand for energy in the face of the possibility of widespread hard confinement. Oil and gas have been two of the main drivers of inflation to date. So cheaper energy would detract from inflationary pressures in the weeks and months ahead.

This week ECB member Fabio Panetta explained that a high percentage of current inflation was due to import prices. For the European Union, this is the same as saying that prices are at the mercy of energy, because of external dependence.

The fall in crude oil prices could continue if countries begin to implement more border restrictions to prevent the spread of the new strain, which would limit international mobility and weigh on fuel consumption. The worst-case scenario would be the implementation of internal mobility limitations, which would deal a severe blow to gasoline and diesel consumption.