Omicron worries subside, solid US data, oil rebounds, gold softer, Bitcoin rises

Financial markets have been on a rollercoaster ride since the middle of last week.  We wanted to believe we were getting close to the end of COVID, but the latest jitters from Omicron variant signaled the inevitable COVID winter surge might already be here. Omicron is the latest COVID test for the economic outlook and we won’t have a clear picture until a couple more weeks. Friday’s turmoil looked a lot worse given the lack of liquidity, options volatility and overall frothy levels for equities.

US stocks are rebounding as optimism grows that the Omicron variant is a cause for concern, but not a 'cause for panic' and could potentially be the catalyst needed to get more of the country vaccinated. Investors will learn over the next couple of weeks if the Omicron variant causes more severe disease than the other variants. So far the MRNA vaccines have proved effective against other variants such as delta and optimism is that even they will eventually need to get tweaked that could be done in a few months time.  

Risk appetite got a boost from both the Pfizer CEO and President Biden calmed markets nerves that we won't go back to the darkest days of the pandemic.  The Pfizer CEO Bourla said he thinks the data will ultimately show the current vaccine will protect less against Omicron but will likely still offer some protection.  President Biden said the US won’t need shutdowns to curb the Omicron variant.

US Data

Pending home sales unexpectedly surged in October as rents skyrocketed and buyers were highly motivated as borrowing costs seem poised to increase steadily as the Fed positions itself to raise rates. US pending homes sales increased by 7.5% from a month earlier, which was a 10-month high.

The Dallas Fed Manufacturing Survey came in slightly below expectations, but still showed manufacturing activity is healthy and the outlook has dramatically improved. The index for general activity came in at 11.8, a miss of the 17.0 consensus estimate and drop from the 14.6 reading in October.  The six-month outlook almost doubled to 28.6, while the raw materials price index hit a series high. 

Oil

Oil prices rebounded for two key reasons: the Omicron variant seemed like it would most likely be short-term disruptive to the crude demand outlook and on growing expectations that OPEC+ will refrain from increasing production by 400,000 bpd.

The Chairman of the South African Ministerial Advisory Committee on Vaccines noted that the cases so far had all been mild, mild -to- moderate which was a good sign. As long as South Africa does not see a massive uptick in hospitalizations, optimism will grow that this new variant won’t lead to a wrath closing of borders.  Highly vaccinated countries will continue to thrive and political pressure will grow to get those countries with low vaccination rates more supplies.  

OPEC+ pushed their meetings to better assess the impact of the Omicron variant, which will most likely be followed by a delay in delivering an extra 400,000 barrels a day in January. Following the global strategic reserve releases and the announcement of dozens of countries restricting travel to and from South Africa and neighboring nations, OPEC and its allies can easily justify an output halt or even a slight cut in production.

Crude prices gave back some its gains after US State Department advisor reminded traders the US could release more oil.  

Gold

Gold prices remained heavy as Omicron panic eased, the dollar rally returned, and after another round of strong US economic data. Wall Street is quickly shaking off last week’s de-risking theme that triggered safe-haven demand for bullion. President Biden said economic lockdowns in response to the Omicron variant are off the table, which means gold could be in trouble if this latest variant mostly yields longer supply chain issues that might fuel the 'inflation is persistent' argument. If supply chain issues deteriorate even further, that could lead to faster tapering and quicker rate hikes by the Fed.

Cryptos

Cryptocurrencies are rebounding after last week’s widespread panic-selling from the Omicron variant blew past many stops. The crypto selloff was an overreaction and buyers are quickly reemerging as traders reassess the impact of a new coronavirus variant. Bitcoin is a part of today’s broad risk rally that stemmed from easing COVID fears but will likely struggle to completely get its groove back until vaccine efficacy results in the coming weeks confirm highly vaccinated countries are going back to lockdown mode.

Bitcoin rose 3.5% to $58,284, which makes the year-to-date gain at 101%. Ethereum is back above $4400 and is almost 500% higher this year. The top two cryptos seem like they may consolidate here, but if the Fed accelerates their taper plans and prospects of rate hikes grow, a return to record highs seen earlier in November will be hard to do.