The FTSE 100 swooned 200 points on Friday and is up 50 points this morning. This is, of course, the effect of the Omicron variant – or as the World Health Organisation doesn’t want us to call it, the Xi. This might be seen as a bit of an over-reaction to a few people in South Africa being identified with a slightly different version of the current sniffles.
For us, as traders, it’s important though for the one thing markets hate more than anything else is uncertainty. So, as the uncertainty continues over what the effects will be then prices will bounce around substantially. Further, as traders that’s what we want. Price volatility is exactly what we’re looking for.
While we don’t know how much of the economy they’re going to close down again prices will fall. As reassurances about how little different the Omicron is spread, how few policy reactions there will be, prices will rise again.
We must also recall that markets are two other things – they are forward-looking and also depend upon what everyone else is thinking, not reality. So, prices fall or rise not on what is actually happening right now but on what people think will. Also, the indices move not on what is reality, but what all other traders think it will be. Rumours of this or that, in uncertain times such as this, will have substantial price impacts.
Think back to the start of all of this. December 2019 and there were vague rumours of something happening out East. It was 14 Feb 2020 when the market took fright of what was to come – long before substantial damage to any Western, let alone the UK, economy – and the FTSE 100 dropped 2,200 points in weeks. The low point was 20 March 2020, again long before the effects of lockdowns and quarantines had even hit the real economy. Markets are indeed those forward-looking things and the low point wasn’t when reality was starting to do just fine again, but when it became obvious that this wasn’t the new Black Death. There was substantial real economic pain still to come but markets rose on the belief that it wasn’t going to be worse than what was already priced in.
It is views about the future that determines the index level. When those views are clouded by uncertainty then the markets will fall. Removal of uncertainty will lead to recovery. This is true almost whatever the news itself is for the uncertainty of what might happen leads to terrible possibilities already being priced in.
The result of this for us as traders is significant price volatility on the index. All of which is going to be driven by opinions on how fierce, or not, the effects of having to fight this new Omicron variant are going to be. Positioning is difficult precisely because of that uncertainty. The volatility is precisely what we’re looking for as traders.