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Market Update
Despite a promising start to Wednesday’s US session, where the S&P 500 was nearly up as much as 2.0% at one point, risk-off ultimately prevailed, as markets continue to be sensitive to Omicron headlines. The headlines that triggered concern yesterday were 1) that cases doubled in one day in South Africa and that hospitalisations are now also said to be rising and 2) that the first case was detected in the UK. The S&P 500 eventually ended the session more than 2.0% lower in the 4510s and is nursing a tentative recovery this morning, though even in pre-market trade, has backed away from earlier highs in the 4550s. That back off from earlier highs came as more mixed headlines came out of South Africa; leading scientists there are seeing an exponential rise in infections, though they also said they do not expect symptoms to be as severe in this wave. European equities are playing catch up to losses on Wall Street last night with the Stoxx 600 down 1.2% today, while Asian equities were mixed despite concerning Covid-19 related headlines also coming out the region (record cases in South Korea, Japan banning flights for a month).
The S&P 500 (in pre-market trade) has now pulled back more than 5.0% from recent record highs. Analysts note that the hawkish tone of Fed Chair Jerome Powell has triggered fears in the market that, unlike in the past, the Fed won’t be there to “have the markets” back in case things get back with Omicron, given their worries about inflation. Mohammed Kazmi, a portfolio manager at UBP, said on Thursday that “in this past what we’ve seen is central banks using COVID as an excuse to remain dovish, and what we’re seeing is central banks turn hawkish despite rising concerns around COVID, so it is a bit of a shift in communication”. Thus, markets might be more vulnerable to the downside to news that threatens the economic outlook, like Omicron does. The key unknowns are the degree to which the new variant can evade vaccine and prior infection (with other variant) immunity, its transmissibility and the severity of symptoms caused.
“We’re going to stay in this pattern of up one day and down the next as long as the Omicron story remains an unknown” David Madden, market analyst at Equiti Capital, told Reuters on Thursday. “We won’t be re-testing Europe’s November highs until we’re certain about the variant’s knock-on effects, and until we know for sure whether we’re going down the road of lockdowns” he added. Analysts also noted that while Omicron is set to remain the dominant force in the headlines until more is known about how it will impact the economic outlook, there are other incoming risk events to watch also. US November ISM Services PMI and the official November jobs reports are both out on Friday, as well as plenty more Fed speak ahead of the start of the start of the pre-15 December FOMC meeting blackout period (when Fed policymakers are no longer allowed to speak). If officials tilt hawkish and the data is strong, this will support the notion that the Fed isn’t going to be hurrying back to add liquidity to the market if Omicron-related risk off worsens.
Looking at other asset classes; oil prices have been choppy ahead of the OPEC+ meeting with mixed reports crossing the wires about what the cartel might be considering in terms of its output policy. Analysts expect them to halt output hikes for now amid heightened Omicron uncertainty. WTI is currently trading in the $65.00s. The US treasury curve, meanwhile, continues to flatten, as short-end yields rise following Powell’s hawkishness earlier in the week and the long-end faltering on concerns that Omicron will damage long-term growth/inflation prospects. 2s are currently just under 0.60% and 10s are currently around 1.42%. In terms of FX, things are pretty quiet today, with most USD majors fairly flat (EURUSD around 1.1350, GBPUSD just above 1.3300 and USDJPY just under 113.00). Thursday is being seen as a bit of a break by some from recent volatility to do with Powell’s hawkishness versus concerns about Omicron. But there is plenty of Fed speak and more important US data incoming that could shake things up.
Day Ahead
The main US data today is the weekly jobless claims number s at 1330GMT, with IJC seen bouncing back from last week’s shock sub-200K number, though is still set to remain at healthy levels. There are a few Fed speakers to keep an eye on starting with Quarles at 1600GMT, Barkin, Bostic and Daly at 1630GMT.
