Risk appetite on the front foot as holidays approach

Market Update

Global risk appetite took a decisive turn for the better at the start of yesterday’s US trading session and this positive momentum, though having waned a little in strength, has carried through into Thursday’s trade. The S&P 500 index ended Wednesday’s session up 1.0% at just below 4700, after a string of positive pandemic-related updates, strong US economic data and increasing optimism that the Biden Administration’s Build Back Better bill is not dead helped pump sentiment. That’s means the index ended the session 3.6% above Monday’s lows in the 4530s. Given that S&P 500 index futures are this morning trading up another 0.2% and to the north of 4700, in tandem with a generally positive tone in Asia markets and in European trade this morning (the Stoxx 600 is up 0.6% and back above 480), the index is just currently trading less than 1.0% below intra-day record highs printed earlier in the month and is barely below the S&P 500 cash index’s closing record high (of 4713) set back on the 10^th of December.

Combing over some of the recent risk positive developments in more detail; a succession of studies has shown that infection with the Omicron Covid-19 variant is significantly less likely to result in hospitalisation versus infection with the Delta variant. A South African study observed that people diagnosed with Omicron between the start of October and end of November were 80% less likely to end up in hospital, a study conducted by Scottish universities found the risk to be two-thirds lower, while London’s Imperial College found the risk to be 40-45% lower. According to Philip Petursson, chief investment strategist at IG Wealth Management, “the Omicron wave won’t derail the economic recovery that’s well underway, it might delay it, but 2022 will have an attractive, healthy economic environment”. “This year,” he continued, “economies reopened from 2020 lockdowns and benefited from all the fiscal stimulus, 2022 will be the path to normalisation of equity returns, interest rates and economic growth”.

In further positive pandemic news, the US yesterday approved Pfizer’s Paxlovid pill for the treatment of Covid-19 at-home for patients at a high risk of developing severe disease. In early trials, the pill was shown to reduce the risk of hospitalisation and death by as much as 90%, which could really help turn the tide against the pandemic. It will take some time to distribute and come into widespread in the US and globally, so may not be relevant for the timeframe of the fast-spreading Omicron wave but should take the edge off of future waves. Moving away from pandemic news, US data was broadly upbeat yesterday. The final estimate of Q3 US GDP growth was upgraded to 2.3% QoQ on an annualised basis and the Conference Board Consumer Confidence index rose more than expected and to its highest level since July. This suggests strong consumption should continue into 2022, supporting a strong US economy.

This Thursday, there have been very few key market developments to add to the above news, with markets seemingly increasingly reverting into holiday mode. Indeed, for US and European markets, this is the final full day of trading, but many market participants will already be away. So further big moves now seem unlikely. Who knows though, it would be typical of US markets for the Santa rally to arrive just in time to push the S&P 500 to a record close just in time for Christmas on Saturday. Note that the NYSE and Nasdaq equity exchanges will be closed on Friday.

Looking at other assets classes; just as with global equities, the dominating factor over the past few days has been risk-on for the above noted reasons. Yields in the US and Europe are up sharply from recent lows, with the US 10-year now trading not too far below 1.50%, up from Monday lows just above 1.35%, while the German 10-year broke above recent -0.40% to -0.30% ranges on Wednesday and is currently pushing on towards -0.25%, its highest levels since the end of November. Commodity markets have also undergone a sharp recovery from Monday’s lows, with WTI crude oil back to trading close to monthly highs just under $73.00 having been as low as $66.00 at the start of the week.

In terms of G10 currency markets, the major trend over the last few days has unsurprisingly been outperformance of the more risk-sensitive currencies like AUD, NZD, CAD and GBP whilst traditional safe-haven currencies like the yen, US dollar and Swiss franc have underperformed. At present, the DXY is trading just to the north of the 96.00 level, where it seems to have found decent support for now. According to analysts at MUFG, “while the recent improvement in risk sentiment on the back of reduced Omicron fears is currently weighing on the U.S. dollar, we expect the correction lower to prove short-lived”. “Hawkish comments from Fed officials over the past week including from Fed Governor Waller and San Francisco Fed President Daly have signalled that they are considering raising rates as soon as the March FOMC meeting” the bank noted. Indeed, expectations that the dollar will regain some poise and push higher in the new year amid an increasingly hawkish Fed and underlying strength in the US economy seems to be a consensus viewpoint amongst FX strategists right now. The fact that the DXY, though lower on the week, continues to trade comfortably within its December ranges and remains on course for substantial on-the-year gains of nearly 7.0% suggests that, from a technical perspective, long-term bullish momentum remains solid.

Looking at the G10 majors in more detail; EURUSD is consolidating just to the north of 1.1300, well within its December 1.1240-1.1360ish ranges and if broadly flat on the day, while GBPUSD has been performing well and has pushed above 1.3400 and into the 1.3430s. That means the pair is up a further 0.6% on the session and is up nearly 2.0% from earlier weekly lows – GBP was disproportionately hit by Omicron concerns recently, so as the news has turned more positive, it has seen a disproportionate recovery. Indeed, in wake of recent news and a slowing pace of acceleration in Omicron’s spread in the UK, tougher government mandated restrictions on the economy to curb transmission after Christmas now seem highly unlikely, according to UK press. Downside risks to the economy posed by Omicron seem to be easing. AUD continues to perform well and is up 0.4% with the help of solid overnight lending data, with AUDUSD up 0.4% and closing in on 0.7250, while NZD and CAD are also a tad higher as risk-on vibes continue. CHF and JPY are the worst performers but are only down between 0.2-0.3% versus the buck on the day.

Day Ahead

There are a few interesting US data points scheduled for release at 1330GMT including November Durable Goods Orders, November Core PCE (the Fed’s favoured inflation gauge), weekly initial jobless claims and November Personal Income and Spending numbers. Also at 1330GMT, monthly Canadian October GDP numbers are released. So things could be a little choppy and if the data is good, could add to the mild risk-on already being observed on Thursday. Then, at 1500GMT, US Michigan Consumer Sentiment data for December is out and November New Home Sales numbers are scheduled for release.