Stocks rally on easing Omicron fears, oil rises

LONDON — Stock markets rallied on Tuesday to fresh record highs as investors bet on reduced economic fallout from the Omicron variant, while oil prices pushed higher as OPEC and its allies raised output.

Traders kept a close watch also over high inflation concerns.

London kicked off its 2022 trading with strong gains for the travel sector that helped push the FTSE 100 above 7,500 points for the first time, while the British pound reached a near two-year high versus the euro.

"The FTSE 100 has set off on a sprint of New Year optimism, shaking off worries of inflation and concerns about the Chinese property market," noted Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

"Stocks reliant on international travel are powering ahead, with British Airways owner, International Consolidated Airlines Group, rising 7 per cent in early trade."

While COVID variant Omicron is spreading like wildfire around the world, it appears to be far less severe than initially feared, raising hopes that the pandemic could be overcome and life return to more normality.

"The biggest driver behind the stock market rally and risk appetite in general is relief that Omicron is not as deadly as Delta, which is fuelling expectations that travel restrictions and lockdowns will be lifted soon," said Fawad Razaqzada, market analyst with ThinkMarkets.

However, inflation, supply chain snags, central bank policy tightening and geopolitical woes continue to weigh on sentiment and analysts have warned that the blockbuster stock market gains seen in recent years could be tougher to attain.

Despite the strong start, "we expect 2022 to be far more challenging from an investment perspective", said Heather Wald of Bel Air Investment Advisers.

"Rarely has a market delivered three consecutive years of double-digit returns, as we have seen from 2019-2021."

European and Asian equity markets enjoyed strong gains on Tuesday, with the CAC 40 striking a new intraday records, following fresh record closes on Monday on Wall Street.

US stocks pushed further higher at the opening bell on Tuesday, with both the Dow and S&P 500 striking fresh all-time highs.

OPEC+ hikes output 

Investors were looking ahead also to Wednesday's release of minutes from the Federal Reserve's December policy meeting, hoping for insight into its plans amid surging inflation, that is forcing central banks to wind back pandemic stimulus and raise interest rates.

The Fed has already started tapering its bond-buying programme and the focus is now on what it will do with interest rates, with some commentators predicting three hikes before 2023.

Elsewhere, OPEC and its allies, as expected, maintained their practice of modestly increasing oil output every month as the rapidly spreading Omicron variant has so far not heavily hit demand.

The OPEC+ grouping, including top producers Saudi Arabia and Russia, has resisted US pressure to more widely open the taps as high energy prices are fuelling a surge in inflation across the world.

The 13 members of the OPEC cartel and their 10 allies drastically slashed output in 2020 as the pandemic wreaked havoc with demand.

Last year, they decided to step it up again gradually as prices recovered, while reviewing the situation every month.

After a short videoconference meeting on Tuesday, the group said it had agreed to raise output by 400,000 barrels per day in February, the same level as in previous months.

The club's members approved a previous hike at their December meeting despite the emergence of Omicron, which had caused prices to fall as markets fretted over its potential impact on the global economy.

The December decision earned the thanks of the White House, nervous of the effect of rising prices at American petrol stations, but it did not prevent crude prices from recovering considerably from their previous slump.

The price of Brent, Europe's benchmark oil contract, hit $79.76 at 13:25 GMT on Tuesday — 15 per cent higher than before the group's December 2 meeting.

OPEC analysts told the group on Monday that Omicron would have a moderate impact on demand and the rise in price is expected to continue in 2022.

While the new COVID variant is spreading like wildfire around the world, it appears to be far less severe than initially feared, raising hopes that the pandemic could be overcome and life return to a little more normality.

Iran exports 

While OPEC+ countries have been gradually increasing output again since last year, analysts note some countries, such as Nigeria and Angola, have been struggling to lift production.

"Important here is that Russia did not lift production in December which could be a sign that they are getting closer to their capacity," SEB chief commodities analyst Bjarne Schieldrop said.

Another heavyweight, Iran, has seen its exports limited by US sanctions.

Talks to revive a deal, which curbed Iran's nuclear activities in exchange for sanctions relief, are underway in Vienna.

They have dragged on since last year but negotiators are pushing to conclude the talks to get the 2015 landmark agreement back on track.

It was thrown into disarray in 2018 when the US withdrew from the accord.