As caution returns, equity rally stalls worldwide

World stock markets stalled at two-week highs on Thursday as increased restrictions in parts of the world to contain the spread of Covid-19 including the new Omicron variant tempered optimism on the vaccine front.

European shares turned lower after opening higher (.STOXX), US stock futures, were in the red and Japan’s blue-chip Nikkei stock index slipped almost half a percent.

That left MSCI’s world stock index (.MIWD00000PUS) hovering near two-week highs but struggling to make much headway after three days of gains. It has risen over 3 per cent this week and is set for its biggest weekly rise in over 10 months.

News on Wednesday from drugmakers Pfizer (PFE.N) and BioNTech (22UAy.DE) that a three-shot course of their Covid-19 vaccine was shown to generate a neutralizing effect against Omicron in a laboratory test has cheered investors and lifted the S&P 500 (.SPX) within 1 per cent of a new record high.

But market participants are now cautious amid fresh steps in many countries to contain the spread of the new variant.

Tougher Covid-19 restrictions in the UK were unveiled late on Wednesday. Investment bank Jefferies Financial Group (JEF.N) asked staff to work from home again, raising questions about banks’ efforts to return to business as usual.

“With Omicron, we still don’t know the efficacy of vaccines and spread and nature of this variant,” said Guy Miller, chief market strategist at Zurich Insurance Group.

“In the near-term, calling where markets go is challenging. Longer-term, we still have many drivers that favour equities,” he said, adding he expected a strong macro-economic environment next year that should support company earnings.

London’s FTSE index was down 0.2 per cent (.FTSE) with British Airways owner IAG (ICAG.L) down 4.7 per cent, while hotel and restaurant operator Whitbread down 1 per cent on the latest restrictions.

“News that fresh social restrictions are being imposed in the UK...have put a brake on the rebound of not just travel stocks but bricks and mortar retailers, and hospitality firms,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Oil prices were also on the defensive. Brent crude futures fell 0.8 per cent to $75.24 a barrel, US crude slipped 0.6 per cent to $72.

The latest developments in China’s troubled property sector also tempered the mood in world markets.

Developers China Evergrande and Kaisa were downgraded to “restricted default” by rating agency Fitch due to non-payment of offshore bond dues, while a source said Kaisa had started work on restructuring its $12 billion offshore debt.