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Market Update
Risk appetite has started the week decisively on the back foot, with continued concerns about the rapid spread of Omicron, hawkish Fed rhetoric and US Democrat Senator Joe Manchin’s “no” to President Biden’s Build Back Better bill combining to act as the Grinch that stole the Santa Rally. Regarding the former, the Netherlands announced a return to lockdown on Sunday, putting pressure on its European peers to follow suit. Local newspapers in Italy reported that new restrictions are possible there as well and there is plenty of chatter in the UK about the possibility of further restrictions as government officials refuse to rule anything out. Meanwhile, in the US, health officials are urging Americans to get booster shots, wear masks and reconsider holiday travel plans.
Meanwhile, Fed Board of Governors member Christopher Waller was hawkish on Friday, saying that the main reason why the Fed sped the pace of its QE taper was so that the March meeting would be “live” for a rate hike. This has unsurprisingly seen traders up their bets on a March rate hike. Finally, US Democrat Senator Joe Manchin over the weekend said that he could not support the Biden administration’s $1.75T Build Back Better social spending bill amid concerns about high inflation amongst other things – without his vote, it cannot pass the Senate. As a result, and also as a reflection of expected disruption due to the spread of Omicron, Goldman Sachs downgraded its estimate for real GDP growth in the US in Q1 2022 to 2.0% from 3.0%.
Given all of the above, global equity markets have started the week lower, with the Stoxx 600 down about 1.5% and trading around 467, and S&P 500 futures down about 1.4% in the 4560s. In fairness, both have picked up from earlier session lows in the respective 462 and 4540 areas with some citing positive preliminary data from Moderna about the efficacy of its booster jab in boosting neutralising antibody levels versus the Omicron variant. But the mood remains very much one of risk off and traders will be assessing whether the arrival of US market participants ahead of the US open (usually from around 1100GMT) will make any difference. Liquidity conditions will be thinner than usual this week given the proximity to Christmas Day (on Saturday).
In terms of some bank commentary, according to MUFG, “investor risk sentiment has been undermined by further evidence over the weekend of the disruptive impact of the new Omicron COVID variant… The stricter lockdown in the Netherlands will heighten fears that similar measures will be adopted in other European countries in the coming weeks.” On a similar note, Deutsche Bank say “Omicron … remains one of the biggest issues for markets right now and has significantly clouded the outlook moving into year-end”, before adding that Manchin’s no to the Build Back Better bill “marks a significant blow for President Biden’s economic agenda”.
In terms of other asset classes, amid the risk off, crude oil markets are substantially lower, with WTI down about $2.0 and in the mid-$68.00s. According to oil broker PVM, “simply put, it is not a case of if but when governments impose tougher restrictions… Both crude markers are taking a sharp dive as the new week gets underway amid the prospect of a bigger than expected Omicron-spurred dent to global demand”. Yield curves in the US and Europe are a little more mixed, which is somewhat perplexing, with short-end yields suffering and longer-term yields flat. For reference, US 2s are down about 3bps to just above 0.60%, despite hawkish Fed rhetoric and last week’s hawkish meeting, while 10s are a tad lower just to the south of the 1.40% level. Turning now to FX markets, things are quite subdued ahead of a week of holiday thinned liquidity, though somewhat reflective of risk off. Risk-sensitive AUD, NZD, CAD and GBP are the laggards, while safe haven currencies CHF and USD are holding up modestly better. The Dollar Index is currently flat in the 96.50 area while the euro is the best performer in FX this morning amid some signals from ECB sources this morning of hawkish discontent at the bank’s recent lack of emphasis on upside inflation risks. These sources matched remarks from ECB member Wunsch over the weekend who said that the bank isn’t sufficiently recognising inflation risks.
Day Ahead
In terms of the day ahead, there isn’t anything of importance on the economic calendar for traders to keep an eye on. Rather, news about the spread of Omicron and the reaction of health and government officials will be the driving theme, as is already the case. Traders should be particularly focused on Europe, where there is chatter about further lockdowns in the UK and elsewhere. Further lockdowns of course pose a downside risk to risk appetite and risk assets.
