New strain and the economy

US stock indices fell before the opening of trading on Tuesday after Fed Chairman Jerome Powell said risks to the economy, the labour market and inflation could become more difficult with the new COVID Omicron strain.

The S&P 500, Dow Jones and Nasdaq 100 stock indices fell 0.81%, 0.98% and 0.51% respectively at Tuesday's premarket as investors overestimated the risks associated with the new COVID Omicron strain. Uncertainty always weighs on financial markets, undermining investor demand for risky assets.

The market recovered surprisingly quickly on Monday after Friday's sharp fall, with the Dow Jones Index falling 900 points and experiencing its worst day since October 2020.

On Friday, the WHO called the new Omicron strain, first identified in South Africa but already found in more than a dozen countries, one that is of "concern" because of 30 new mutations.

On Monday evening, the US central bank issued a statement from Jerome Powell that the new Covid-19 strain and the recent rise in cases of the coronavirus pose a threat to the US economy and complicate the inflation situation.

Amid the news of the new strain, Wall Street has lowered its forecast for future Fed rate hikes. Now more investors not 25%, but 35% believe Fed rates will still be close to zero in June 2022, according to CME Group's FedWatch tool.

Treasury Secretary Janet Yellen is also due to address the Senate Banking Committee on Tuesday to reflect the US government's reaction to the new threat.

The rapid rebound in stocks on Monday was partly due to President Joe Biden imposing restrictions on air travel from South Africa, but said other restrictions were not yet under discussion. In addition, vaccine manufacturers said they were ready to fight Omicron's new COVID strain.

Pfizer (PFE) and BioNTech (BNTX) said they could adapt their mRNA vaccine to protect against the new strain within six weeks and start delivering batches within 100 days. Moderna (MRNA) CEO Stephane Bancel told the Financial Times that he expected existing vaccines to be less effective against the new strain. He said it could take months to develop and deliver a vaccine specific to protect against Omicron.

Mark Hackett, Director of NationWide Investment Research, said: "this week it will be important to determine whether investor buying continues to work or whether markets is vulnerable to further major research."