European stocks drop after Wall Street closes lower

European stocks opened lower on Thursday after a slide on Wall Street late in the previous session, as traders weighed the new Omicron coronavirus variant and the direction of future monetary policy.

Europe’s Stoxx 600 fell 1.2 per cent, continuing a week of volatility driven by the emergence of the new strain, which was detected for the first time in the US on Wednesday in a vaccinated person in California, as cases continued to surge in South Africa. London’s FTSE 100 dropped 1 per cent.

European equities and oil prices had rallied on Wednesday, leading to an early bounce on Wall Street, as traders bought back in to economically sensitive banking and industrial shares that had fallen heavily in the preceding days.

But the S&P 500 equity gauge closed 1.2 per cent lower in New York, marking its largest intraday swing since March and followed a punishing session on Tuesday that had left the index down almost 2 per cent.

Investors on Wednesday raced to hedge, with trading volumes of put options — derivatives that offer protection if the price of a security declines — hitting the highest level in 17 months, according to Bloomberg data.

The Vix index, Wall Street’s so-called fear gauge that measures expected stock market volatility, traded at an elevated 31.1 points on Wednesday, above its long-run average of about 20 and its highest level since March.

Markets have also been assessing comments on Tuesday by Jay Powell, chair of the US Federal Reserve, that suggested he was willing to accelerate the reduction of the central bank’s $120bn of monthly bond purchases that have supported the stock market since March 2020.

Powell also characterised the world’s largest economy as “very strong” ahead of jobs data on Friday that economists polled by Reuters expect to show US employers added more than half a million hires last month.

Omicron, which the World Health Organization last week declared a “variant of concern,” features a high number of mutations that have prompted fears it could evade the protection provided by vaccines.

Governments have rushed to tighten travel restrictions in response to the new variant’s spread. US president Joe Biden is expected later on Thursday to announce new measures intended to address Omicron.

Investors are hoping the variant proves as manageable for policymakers and vaccine producers as the Delta variant of the virus, which temporarily shook US and European stock markets in July before they hit highs last month in response to economic recovery and strong corporate earnings.

“It is not worth panicking about as we don’t have enough facts at this stage,” said Jeremy Gatto, multi-asset investment manager at Unigestion.

“Vaccines becoming completely ineffective and the risk of further lockdowns is not our core scenario”, he added, “but obviously the short term risks to markets have increased.”

The yield on the benchmark 10-year Treasury note rose 0.01 percentage points to about 1.45 per cent. Brent crude, the oil benchmark, rose 1.8 per cent to $70.09 a barrel after heavy swings in recent days.

Asian equities were mixed, with Hong Kong’s Hang Seng index adding 0.4 per cent while Tokyo’s Nikkei 225 dropped 0.7 per cent.