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Market Update
Risk appetite is somewhat mixed on Tuesday, with markets cautious ahead of this week’s central bank bonanza and amid further news flow on the Omicron front as the year-end approaches. US equities fell on Monday (S&P 500 -0.9%), though the index remained within recent ranges. In pre-market trade, the S&P 500 is down a further 0.4% and trading around the 4660 mark. Downside in US pre-markets is in fitting with a broadly negative APAC session, with stocks cautious there after the Asian Development Bank (ADB) lowered its growth forecast for developing Asia to reflect the new risks brought about by the emergence of Omicron, and on negative China pandemic news; the first Omicron case was detected in China in Tianjin, while the major manufacturing province Zhejiang currently experiencing its first Covid-19 outbreak of the year and tens of thousands of citizens there are in quarantine, with virus-hit areas now suspending business operations. In Europe, indices are mostly flat.
According to a senior economist at Mizuho, “everyone has their hands in their pockets at the moment, first because of the major (central bank) events that are coming up and also because most people had a fairly successful year and don’t want to blow it at the end of the year”. Meanwhile, according to equity strategists at UBS, “equity markets will stay skittish as there is tension between Omicron and news flow on one side, and a busy calendar for central banks on the other, while we stand between two earnings seasons”. “But we’re no longer talking about the same restrictions we had in Q1 2021 or 2020”, UBS continues, “so in the near term, restrictions across Europe will only be a modest drag on growth.”
US yields, meanwhile, are fairly subdued, with the 2s flat in the 0.65% area and the 10s flat just to the south of 1.43%, while European yields are mostly pointing higher, though do still for the most part remain within recent ranges. In the immediate future and before things get very busy on Wednesday and Thursday, market participants will be watching the release of US PPI number for November at 1330GMT. Median forecasts are for the headline YoY rate to rise to 9.2% after coming in at 8.6% the month prior. For now, ING “view long-end rates as capped, but short yields could make more headway, for instance, on an upside U.S. PPI surprise”.
Looking at other assets classes, oil prices are broadly flat with WTI in the low-$71.00s and Brent in the mid-$74.00s. Following on from the release of the OPEC Monthly Oil Market Report (MOMR), on Monday, which said that the Omicron variant’s impact on fuel demand would be mild, the International Energy Agency (IEA) released its monthly Short-Term Energy Outlook (STEO) report. The report said that the new Omicron coronavirus variant was set to dent the global demand recovery while supplies were set to increase next year. “The surge in new COVID-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is underway” it said. Moreover, the report lowered oil demand growth forecast for this year and for 2022 by 100K BPD due to expectations for a hit to jet fuel demand amid the new Omicron-related travel curbs.
Turning to FX markets; the US dollar is a little weaker on Tuesday but continues to trade within recent ranges ahead of today’s November PPI report, tomorrow’s November Retail Sales report and then the FOMC rate decision, with the DXY undulating to the north of the 96.00 level. Resistance in the 96.50 area has acted as a ceiling for now, but strong data and a hawkish Fed may be enough to send the index back on towards mid/late-November highs near 97.00. Amid the buck’s latest pull back, the euro, Swiss franc, pound sterling and New Zealand dollar have all been able to recover into positive territory and are each up between 0.2-0.3% on the session. EURUSD has recovered back to the north of the 1.1300 level, with mixed October Industrial Production figures not shifting the dial at all for the euro, while GBPUSD has recovered from a brief dip to 1.3200 to the 1.3250 area, with a strong labour market report broadly ignored given that the BoE (who announce policy on Thursday) are more focused on Omicron-related risks right now. For reference, today’s data showed employers hiring a record number of staff in November, in a strong signal that the UK’s labour market weathered the end of government furlough scheme very well. “The (UK) economic outlook has been overtaken by Omicron concerns, and we continue to expect no change in policy this week” said TD Securities. AUD, JPY and CAD are all flat versus the buck, as FX markets broadly await central bank meeting and data later in the week.
Day Ahead
As noted, the main event today will be US PPI at 1330GMT. Thereafter, it should be a quiet session, with Omicron headlines the main thing to look out for. Stocks might remain choppy, but FX and bonds are likely to remain subdued ahead of Wednesday’s Fed meeting, Thursday’s ECB, BoE, SNB and Norges Bank meeting and Friday’s BoJ meeting.
