- Stock market party continues as virus risks sidestepped, though US futures dip slightly
- But Omicron begins to bite as UK’s Johnson brings in Covid Plan B, pound takes a knock
- Loonie also slips as BoC cites Omicron danger; all eyes now on US inflation data
Stocks remain optimistic but rally cools
There were few signs of worry about the Omicron outbreak in equity markets as traders remained hopeful that the economic disruption from this new variant will be kept to a minimum. A small study by Pfizer and BioNTech showed that three doses of their vaccines boost antibodies against Omicron to similar levels as two doses do against other strains. For investors, this was yet another reason not to get gloomy about the near-term growth outlook despite the many uncertainties of the Omicron variant.
Markets may also be hoping that the big central banks will ease up on their hawkish rhetoric of late and exit their pandemic-era emergency programs more slowly. Stocks in Asia have already received a major bump up this week from a series of growth-boosting measures by Chinese policymakers. The drop in China’s producer price inflation in November and the softer-than-forecast rise in consumer prices in data out today raised expectations that more policy action could be on the way.
China’s CSI 300 index led the gains in Asia on Thursday, though the Nikkei 225 bucked the trend to finish the session lower. Stocks in Europe opened mostly higher, while US futures were indicating some profit-taking may be due on Wall Street today.
The S&P 500 came within a whisker of its all-time closing high on Wednesday and the 4,700 level seems a natural resistance point for the recent rally to take a pause, especially as crucial inflation numbers are due out of the US tomorrow that could easily spoil the party.
Dollar pares losses, pound slumps on new Covid restrictions
In the currency markets, however, the optimism receded somewhat as expectations that some central banks might need to dial back on plans to pre-emptively tighten policy to combat surging inflation weighed on the riskier pairs, lifting the greenback.
The dollar index edged back above the 96.0 level after breaching it yesterday. It came under pressure mainly from unusually strong demand for the euro, which convincingly reclaimed the $1.13 handle. However, the pound headed in the opposite direction, slumping against both the dollar and the euro after British Prime Minister Boris Johnson announced a new set of measures to slow the spread of the Omicron variant.
The UK government is making masks mandatory again for most indoor places and introducing a Covid pass for certain venues and events, as well as advising people to work from home. Whilst the new guidelines are nowhere near as strict as the recent restrictions imposed in many other European nations, the UK is coming from a place of near-zero Covid rules so there’s likely to be a mild hit to economic growth.
More significantly, the Bank of England might be less confident to hike interest rates next week given the potentially weaker economic backdrop. Money markets have priced out the odds for a rate increase in December following yesterday’s announcement and are now looking at February for liftoff.
Nevertheless, sterling was steadier today, hovering around the $1.32 level, while the euro fell back slightly. The European Central Bank also meets next week and policymakers are reportedly in agreement to temporarily ramp up the regular asset purchase program once the pandemic program ends in March.
Loonie slides after not-so-hawkish BoC meeting
The Canadian dollar was one of the worst performers on Thursday, reversing sharply from yesterday’s 2½-week lows versus its US counterpart. The loonie skidded after the Bank of Canada yesterday dashed hopes of an early rate hike, sticking to its guidance of Q2/Q3 2022. The Bank was unexpectedly downbeat about the immediate growth picture, worried not only about Omicron but also about the impact from the recent floods in British Columbia.
The aussie and kiwi slid too, while the safe-haven Japanese yen thrived on the back of other currencies’ pain, as sovereign bond yields pulled back globally.
Oil prices were down, but surprisingly steady, but the stronger dollar kept gold within a narrow range.
