Asian equity markets and futures across Europe and the US dropped heavily on the first trading day of the week as surging Omicron Covid-19 cases led to new strict measures in many European nations and threatened to curb year-end celebrations. The Netherlands was first to go into lockdown on Sunday, Ireland imposed new Covid-19 restrictions, and the UK could tighten measures before Christmas. The trend is now clearly heading towards tighter borders in Europe and many other countries just when we thought fears over Covid were over.
Not only is the economic growth outlook now being clouded by the new variant, but inflation has also become the big elephant in the room. Given that new strict measures will likely further impact supply chains expect prices to continue to rise. Central banks led by the Federal Reserve are no longer ignoring inflation pressures, which makes it different from previous chapters of the pandemic.
It will be interesting to see if dip buyers will emerge as we head into the year-end. Over the past 18 months, buying the dips was an extremely profitable strategy, and this time Santa may come to the rescue. However, neither fiscal nor monetary policies support a Santa Clause rally that calls for a positive performance in the last five trading days of the year and the first two trading days of 2022. US President Joe Biden may see his signature $1.75 trillion social spending bill crushed as a key Democratic senator Joe Manchin made it clear he will vote against the legislation.
Another fact troubling investors is the lack of market breadth. Less than a third of the Nasdaq composite index constituents are trading above their 200-days moving average, suggesting that only a few big names are driving the rally. The narrower this group of gainers becomes, the more volatility you expect going forward. However, given the few available alternatives, and the high cash allocations, the narrowing breadth may continue to hold for an extended period without leading to a big crash in benchmark indexes.
Oil is today’s biggest loser so far, slumping more than 3% in Asian trade. Unless OPEC decides to surprise with a special announcement, prices will continue to be driven by Omicron headlines. Meanwhile, the dollar continues to attract demand as the fear of the unknown drives traders into the safe haven.