- Global markets in a better mood as ‘Omicron’ nerves calm down
- Riskier currencies, stocks, and oil rebound but not convincingly
- Spotlight now turns to Fed chief and incoming virus news
Markets lick wounds
Black Friday discounts hit the financial markets this year too and many shoppers were waiting eagerly. European stock markets lost a stunning 5% on Friday but the sense of panic has subsided already after some reports played down the severity of the new ‘Omicron’ variant.
The latest reporting suggests that while the new variant may be more transmissible, it hasn’t been very deadly so far in younger people. We won’t really know anything concrete for a couple of weeks, yet markets have taken comfort in the fact that vaccine manufacturers are already lining up to update their products against this strain.
As such, the dip has been bought once again, although not in a convincing manner. Most assets have only recovered a fraction of their Omicron-related losses, which suggests that money managers are playing some defense here.
Taking a look across markets, European equity indices are trading higher by 1% today. That is a mere stabilization after last week’s obliteration. Wall Street futures point to a similar rebound today, but US stocks only fell around 2% on Friday, so this is a much more significant rebound and another testament to the global demand for US assets.
The issue is that as the year draws to a close, fund managers have a greater incentive to safeguard their portfolios from excessive volatility. With the S&P 500 higher by 24% this year, do you protect your yearly performance by slashing risk exposure or take the chance that the Omicron storm will blow over?
Another problem is that the Fed just doesn’t have much maneuvering room to help markets when inflation is already running above 6% and new global restrictions threaten to inflict more damage on supply chains. Normalization can only be slowed so much if inflation stays scorching hot, so the long-standing assumption that the ‘Fed has our backs’ might not hold anymore.
In energy markets, oil prices have recovered less than half of their losses even despite speculation that recent events provide OPEC with the perfect cover to slow down production increases. That speaks to the lingering doubts about global demand, especially with travel bans making a comeback.
Currency markets also uneasy
This fragile recovery was also reflected in the FX complex. Commodity currencies like the Australian, Canadian, and New Zealand dollars are all trading higher but without much conviction, as the rebound only accounts for half of their latest losses.
Echoing this theme, the yen has managed to defend its recent gains, in defiance of the rebound in global yields that is usually a curse for the currency. Safe-haven demand seems to have returned, perhaps as Japanese investors repatriate some cash. The dollar remains undecided, caught between defensive flows and the volatility in yields.
Inflation data from Germany will top the economic calendar today, after the ECB’s Schnabel suggested that ‘peak inflation’ will likely be reached this month. There’s also a heavy dose of Fed speakers, including Chairman Powell and New York Fed chief Williams at 20:00 GMT ahead of Board Governor Bowman at 22:00 GMT.
While they are unlikely to drop bombshells, any comments relating to the Omicron variant could be crucial in setting expectations for the December FOMC meeting.