Asian Stocks Dip as Omicron Spreads, Fed Decision Looms

Asian Stocks Decline Amid Omicron Spread and Fed Decision

By Paulina Duran

SYDNEY (Reuters) – Asian stocks and oil prices slipped on Tuesday as the spread of the Omicron coronavirus variant rattled investors who were already on edge ahead of a slew of central bank decisions this week, including a key Federal Reserve meeting.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.46%.

China’s CSI300 index was also 0.41% lower, after health authorities in Tianjin detected mainland the country’s first Omicron case.

Major Chinese manufacturing province Zhejiang is also fighting its first COVID-19 cluster this year, with tens of thousands of citizens in quarantine and virus-hit areas suspending business operations.

The combination of the economic risks from the Omicron variant and a potentially more hawkish tone from the Fed on Wednesday dampened risk appetite.

“We expected to see an acceleration of tapering by the Fed and, of course that bringing forward interest rate increases, so it’s going to be interesting to see how the market deals with that,” said John Milroy, an adviser at Ord Minnett in Sydney.

“I think there are reasons why you might expect to see money go back into cash for a bit, in expectation that the start of 2022 is going to be a volatile period.”

Hong Kong’s Hang Seng Index was down 1%, South Korea’s KOSPI was 0.4% lower, Japan’s Nikkei stock index was down 0.13% and Australian shares were 0.31% lower.

The Fed is on Wednesday expected to signal a faster wind-down of its $120 billion a month bond buying programme in a move to fight high inflation, which could move it one step closer to raising interest rates.

The dollar edged higher ahead of the upcoming meetings, with investors eyeing the possibility that the Fed will start to raise rates in 2022.

“Volatility will remain elevated throughout all of (these) decisions from the Fed, ECB, and BOE,” said Edward Moya, senior analyst at OANDA.

The European Central Bank, the Bank of England and the Bank of Japan are also meeting this week, and are each heading toward normalising their own monetary policies.

Fears over the Omicron variant of COVID-19 were heightened after British Prime Minister Boris Johnson warned of a “tidal wave” of new cases, and the World Health Organization said it poses a “very high” global risk, with some evidence that it evades vaccine protection.

Oil futures eased as new doubts emerged about the effectiveness of vaccines against the Omicron coronavirus variant, though OPEC predicted in its monthly report that the variant’s impact on fuel demand would be mild.

Brent futures fell 83 cents, or 1.10%, to be at $74.32 a barrel, while U.S. West Texas Intermediate (WTI) crude was 8 cents, or 0.11%, lower at $71.21.

The FTSE index fell 0.83%, while the pan-European STOXX 600 index lost 0.43% and MSCI’s gauge of stocks across the globe shed 0.80%.

The Dow Jones Industrial Average fell 0.89% and the technology-heavy Nasdaq Composite fell 1.39%.

The dollar index rose 0.27%, with the euro down 0.01% to $1.1282, seen vulnerable given expectations the Fed will tighten policy more quickly than the ECB.

The benchmark U.S. 10-year Treasury yield fell on Monday and the yield curve flattened as traders prepared for a hawkish Fed.

The yield on 10-year Treasury notes was down 6.5 basis points to 1.424% and the 30-year Treasury bond yield was down 6.7 basis points to 1.817%. [US/]

(Reporting by Paulina Duran in Sydney, and Dhara Ranasinghe and Elizabeth Dilts Marshall in New York; Editing by Sam Holmes)