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Market Update
Markets have reverted to a choppier, more headline driven mode this morning after another risk on surge yesterday. Just to recap yesterday’s price action in US markets quickly, the S&P 500 posted its best one-day gain since November 2020 of over 2.0% yesterday, with the Dow gaining 1.4% and the Nasdaq 100 gaining 3.0% as investors rushed to buy the Omicron dip as markets priced out prior pessimism about the global economic outlook as the narrative of Omicron being a milder variant-built steam. Comments from top US infectious disease expert Anthony Fauci that the new variant appeared not to be as bad as delta (though more transmissible) appeared to be the major catalyst for the rally.
Turning now to this morning’s move and headlines, as noted things have been choppier amid mixed headlines. Yesterday evening, a study was released out of South Africa that showed the Pfizer/BioNTech vaccine to only be partially effective in neutralising the Omicron variant (about 40x less than against prior variants). However, the vaccine makers produced a study this morning suggesting that efficacy versus Omicron is largely restored by a third booster jab. Elsewhere, news emerged that the UK government is set to implement its Covid-19 “plan B” which would encourage people to work from home and potentially implement vaccine passport rules and restrictions on the hospitality sector.
As a result, European equities are paring some of yesterday’s gains, with the Stoxx 600 down about 0.2% this morning and back below 480 (though still up around 3.6% on the week). US bourses, meanwhile, are flat with S&P 500 index futures trading just under the 4700 mark. Whilst Omicron-related headlines will remain the dominant driving force for markets over the coming weeks, the recent “relief rally could be quite short-lived if US data on Friday shows high inflation is looking sticky, or persistent – pick a word that isn’t transitory” said Stefan Hofer, chief investment strategist for private bank LGT in Asia Pacific.
Analysts note that the tone in bond markets has been far more cautious than in equities this week. Whilst US bourses recovered back to pre-Omicron levels, long-term US yields remain subdued, with the 10-year still below 1.50% (currently around 1.475%), roughly 20bps below recent, pre-Omicron highs just shy of 1.70%. “Improvement in some risk assets is real but we share the bond market’s caution,” said analysts at ING. “What seems more likely to us, is that yield curves continue to flatten on central banks’ hawkish warnings, especially if the current Covid-19 wave ends up adding to their inflation angst as has now been suggested by officials from the Fed, ECB, and BoE alike” the bank continued.
Looking at G10 FX markets, the tone is mixed. GBP is unsurprisingly the underperformer amid the touted tightening of Covid-19 curbs in the UK, with GBPUSD dropping to fresh YTD lows under 1.3200 and EURGBP hitting its highest levels since mid-November above 0.8550 as a result. The other underperformers are the yen (down 0.2% on the day versus the buck), while the outperformers are the euro (up 0.3%), the Aussie (up 0.2%) and the Swiss Franc (also up 0.2%). All in all then, no definitive risk appetite to be derived looking at FX performance, which is in fitting with the broader market tone.
CAD is flat ahead of the BoC meeting at 1500GMT; the bank is expected to leave interest rates unchanged at 0.25% and, in the absence of a post-meeting press conference or new economic forecasts, is not expected to deliver any fireworks. The most notable aspects of the meeting will be what the bank says about Omicron – analyst speculate they will follow in the footsteps of the Fed in acknowledging that it is a risk but hasn’t altered the economic outlook just yet. Any updated remarks about inflation would also be of note. The scope for CAD volatility is there if the bank sends any indications that a rate hike earlier than Q2 2022 might be forthcoming.
Day Ahead
The only other notable economic events today are 1) the release of US JOLTs Job Opening numbers for October at 1500GMT – the data should confirm that demand for labour (i.e. the number of job openings) remained well above the number of unemployed persons, which should underpin the Fed’s view that the labour market in the US is currently very tight and support market expectations for the bank to agree on accelerating its QE taper when it meets next week – and 2) official crude oil inventories data at 1530GMT. Bond traders will be watching the US 10-year note auction at 1800GMT.
