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Market Update
Risk assets have lost a little bit of steam on Thursday, though still hold on to the bulk of this week’s earlier gains, as markets take a breather from recent risk-on flows amid more mixed headlines/commentary on the Omicron front and ahead of key upcoming economic events including US CPI on Friday ahead of next week’s Fed meeting, as well ECB and BoE meetings. European equities for the most part trade with a modestly negative bias on Thursday, with the Stoxx 600 down about 0.2% around 477, while S&P 500 futures trade with losses of about 0.3% in the 4680s.
Risk assets took solace in the news yesterday that according to Pfizer, three shots of their vaccine was able to neutralise the Omicron variant in lab tests, which comes against the backdrop of a steady flow evidence in South Africa and elsewhere in the world that infection with Omicron is not associated with severe symptoms. However, traders also had to digest fresh imposition of Covid-19-related restrictions in the UK and elsewhere on Wednesday, as cases (mostly still driven by the delta variant) rise. Moreover, the transmissibility of Omicron remains a worry, with a Japanese study suggesting the variant is up to 4.2 times as transmissible versus delta.
In terms of some analyst commentary, according to Guy Miller, chief market strategist at Zurich Insurance Group, “with Omicron, we still don’t know the efficacy of vaccines and spread and nature of this variant”. “In the near-term,” he continued, “calling where markets go is challenging… (but) longer-term, we still have many drivers that favour equities”. Meanwhile, analysts at JPM said “the market is assuming it is just a question of ‘how quickly can we rollout booster jabs’ rather than going back to square one”. Finally, ING’s Rob Carnell was quoted in Reuters as saying “the UK has moved back to work from home as the norm… Other countries will doubtless follow… At the very least, the F&B industry and leisure will suffer from this at the most critical time of the year for them”. “I’d be hesitant before piling back into risk assets at this time of the business year,” he concluded.
Looking at bond markets; yields are a tad lower after yesterday’s significant steepening. To recap, 30-year yields were up more than 10bps, rising from around 1.80% to 1.90% as bond investors unwound recent Omicron-related pessimism about the long-term global economic outlook. 30s are down about 4bps this morning to just above 1.85%. 10s also saw a decent move higher yesterday, reaching as high as 1.54%, but have since reversed back under 1.50% again. 2s remain elevated, given they are mostly driven by short-term Fed tightening/easing expectations, and currently trade around 0.68%, having at one point gone above 0.70% yesterday.
Turning to commodities and FX; Covid-19 curb announcements in the UK and elsewhere have been back in focus and have sent oil back from yesterday’s highs at $73.00, with WTI now trading around $71.50, so still substantially up on the week. The slightly more risk averse market tone this morning that is weighing on crude and stocks, and also likely contributing to weakness in yields, is for the most part weighing on risk sensitive FX; AUD, CAD and NZD are all underperformers, though are also joined by the euro and Swiss franc. Technical selling after EURUSD failed to break above key resistance in the form of a long-term downtrend at 1.1350 is weighing on the pair, which now trades closer to 1.1300. GBPUSD is only a tad negative on the day and trades close to the 1.3200 mark, despite yesterday Covid-19 “plan B” announcement (that brings in new curbs on everyday life) and as BoE rate hike expectations for next week’s meeting become more dovish. JPY is the outperformer amid the slightly risk off vibe. Amid lower US yields, with USDJPY slipping back under 113.50.
Day Ahead
Ahead, aside from the release of US weekly jobless claims figures at 1330GMT, its set to be a quiet day calendar wise. That means Omicron-related headlines will likely continue to dictate the action, from a macro-perspective. Some traders have referred to the current market dynamic as being driven by “virus on, virus off” (as opposed to the classic “risk on, risk off”).
