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Omicron woes drag on sentiment, dollar extends gains


  • Wall Street joins global rout as Omicron fears resurface but selloff eases today
  • Dollar edges up to one-week highs as Omicron clouds outlook for central banks
  • UK jobs numbers kick off busy week, US data eyed ahead of Fed

Optimism fades amid fresh Omicron gloom

Equity markets were feeling the pressure from renewed concerns about the global growth outlook as China imposed draconian restrictions after the detection of the country’s first Omicron case, while the UK’s announcement of its first death from the new variant further spooked investors.

Last week’s relief rally is in danger of being pared back as optimism that the Omicron variant will not pose a major threat to the global economy appears to have been unfounded. Shares on Wall Street tumbled on Monday, with growth-oriented stocks taking a heavier beating. The Nasdaq Composite declined by 1.4%, while the S&P 500 and Dow Jones both closed down 0.9%.

Sentiment soured on Monday as the virus news pouring in was mostly bad for the economic outlook for the next few months. Fears that the supply shortages and bottlenecks that have been dogging industrial production and fuelling inflation will only get worse were heightened after businesses in a major Chinese manufacturing hub were forced to shut down due to a new cluster of virus cases. Although the latest outbreaks are unrelated to the one case of Omicron, China’s zero-Covid approach means more lockdowns could be on the way.

Meanwhile, lawmakers in the UK will today vote on whether to approve the government’s Plan B, which includes the introduction of a Covid pass for entry into nightclubs and big events. It comes after Boris Johnson confirmed the UK’s first death from Omicron.

The gloomy headlines are making investors nervous ahead of several key central bank decisions coming up over the next few days where tighter policy will be on the agenda for most of them.

Stocks in Asia were additionally pulled lower by worries that more Chinese property developers are heading towards default. China’s CSI 300 index slipped 0.7%.

European indices opened higher, recouping some of yesterday’s big losses, but later fell back as US stock futures also turned negative.

Markets on standby for central bank decisions

In the broader markets, the mood was also subdued as both the caution ahead of the Fed, ECB and Bank of England decisions as well as the fast-developing events with the Omicron variant kept investors on the sidelines. The Federal Reserve is widely expected to quicken its tapering process tomorrow, but the real focal point will be how many rate hikes policymakers will pencil in for 2022.

Treasury yields inched higher on Tuesday after slumping yesterday and the safe-haven favourite Japanese yen was mostly weaker. The US dollar, however, remained in demand, gaining marginally against a basket of currencies to hit a one-week top before easing slightly.

The European Central Bank will probably strike a dovish tone on Thursday but the Bank of England is anticipated to postpone its rate hike for next year as the UK faces fresh virus curbs and Johnson warns of a “tidal wave” of Omicron cases.

Euro and pound steady

However, the more pessimistic scenario for the British economy looks mostly priced in to the pound already as cable has steadied around $1.32 this week. Employment in the UK rose less than expected in the three months to October, though the drop in jobless claims accelerated in November, suggesting the labour market continues to tighten despite the sluggish growth.

The euro has also halted its decline for now, hovering around $1.13 since late October.

On the other hand, the riskier currencies have been under somewhat heavier selling pressure in the last few days, with the loonie hit particularly hard even though oil prices have been drifting sideways.

Later in the day, producer prices will be watched out of the United States, while RBNZ Governor Adrian Orr’s testimony before lawmakers could attract some attention too.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-omicron-woes-drag-on-sentiment-dollar-extends-gains-151616
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