Market seesaw continues as Omicron fears fade

Europe

Markets in Europe are enjoying a decent turnaround today, starting December on a more positive note than how they finished November, as the Omicron seesaw in sentiment continues.

The DAX is enjoying a strong session, despite concerns about how the Germany’s health system is dealing with Delta cases, while the FTSE100 is lagging a little, and while we’re still lower than a week ago, barring any setbacks around Omicron we could well start to see some stabilisation, after the whiplash inducing moves of the last few days.

There are a number of reasons for this more positive tone, one being the assurances from BioNTech founder and CEO Ugur Sahin that the current vaccines will still provide a decent defence against the new variant, even if they aren’t as effective. As a virology expert his comments are a good counter narrative to the slightly more alarmist tone from Moderna CEO Stephane Bancel which sent markets spinning lower yesterday. We’ve also heard from a WHO official who said that new vaccines are unnecessary, and that infections so far have been mild, reinforcing the more positive narrative. 

Putting concerns about Omicron to one side, markets have also been able look past yesterday’s unexpected shift from Fed chair Jay Powell that the Federal Reserve was looking to shift its focus back to the inflation part of its mandate, and that it would be prudent to start accelerating discussions on a faster tapering of asset purchases at this month’s meeting of the FOMC.

Powell’s acknowledgement that the term “transitory” has become meaningless and means different things to different people is welcome, if a little late, although its not immediately clear what it means in the longer term when it comes to Fed policy. With the inflation target now presumed to be met, the bigger question is whether that means we can expect rate hikes to come quicker, and that is far from clear.

Before the scare over Omicron markets were pricing in the prospect of two rate hikes next year, and that has reverted back to where it was pre-Thanksgiving, which means the focus is now back on the data, assuming Omicron is as benign as early indications suggest it could be.

This expectation of a more benign outcome, as a WHO official says early data shows existing vaccines should be effective, has seen a wholesale rebound in the likes of travel and leisure stocks, with British Airways owner IAG, and Premier Inn owner Whitbread leading the way, along with the likes of BP and Shell as oil prices rebound ahead of this week’s OPEC meetings.

The lack of appetite for co-ordinated travel restrictions amongst EU leaders may well also be helping on the margins with easyJet and Wizz Air also showing strong gains.

BT Group continues to see gains on expectation of further bid speculation.

On the downside, lockdown favourite Ocado is lower, as is Croda International as the prospect of vaccines having to undergo tweaks subsides.     

US

US markets have shaken off yesterday’s surprise at Fed chair Jay Powell’s hawkish tilt, opening higher after the latest ADP employment report showed that 534k jobs were added in November, reinforcing the narrative that the US economy is ticking along just fine. 

The latest ISM manufacturing report for November showed an improvement to 61.1, with prices paid moderating slightly to 82.4, while the employment component rose to 53.3 from 52.

Salesforce latest Q3 numbers showed a business that has continued to outperform, with revenues coming in at $6.86bn, well above expectations with profits rising to $1.27c a share. The outlook for Q4 however saw the shares turn lower after hours over disappointment over guidance. Profits for Q4 were expected to come in at $0.72c a share, quite a sizeable fall over concerns that it increased competition from the likes of Microsoft and Amazon could impact its margins over the next few quarters. Despite this lower than expected forecast the company upgraded its full year numbers to $4.68c a share from $4.37c, so go figure.

Vaccine stocks have also slipped back after a WHO official said that existing vaccines should suffice for the current spread in the Omicron variant, with Moderna, BioNTech and Novavax on course to close lower for the second day in succession. 

FX

The more optimistic tone rippling through markets has seen the US dollar slip back further after yesterday’s seesawing.

The Australian dollar is amongst the better performers after the latest GDP number showed that the economy contracted less than was originally feared in the most recent quarter, slipping back -1.9%, much better than the -2.7% that was feared. With the RBA due to meet next week, and the Australian dollar hitting thirteen-month lows yesterday, we could be seeing some position squaring starting to take place in case the Australian central bank adopts a hawkish tilt. 

The pound is also recovering some of its lost ground, having hit a two week low against the euro yesterday.

Commodities

Having dropped to a three-month low yesterday, Brent crude prices have rebounded strongly ahead of a two-day OPEC meeting where oil ministers could delay the addition of another 400k barrels a day of output to daily production. OPEC struck a cautious tone in their preliminary statements today, despite various reports that infections so far with respect to Omicron have been mild, which would imply a short-term disruption to demand. We could see OPEC+ decide to delay the additional 400k output boost until later in the month.