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Market Insights

Turnaround Tuesday?

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Just when markets thought they were done with Coronavirus, the omicron variant dragged them back in…

The big question… Is this selloff in risk going to be sustained?

The answer?

It’s too soon to tell. Markets appear to have panicked based on very little actual information. This combination of panic, holidays and low liquidity is potent. Nowhere was this more evident than the oil market.

Picture 2 Turnaround Tuesday

Prices tumbled, falling just below the 200 day moving average on Friday before recovering somewhat on Monday.

Unwelcome uncertainty has been introduced across the board. OPEC+ meet this week. All eyes on their response and if they choose to pause their production increases and reassess next month.

What is clear early on is that news flow will likely dominate the data releases. E.g. Even if NFP’s beat expectations at the end of the week, widespread economic restrictions will likely lead to future job losses...

So what are we looking out for?

  • Government Responses: Lockdowns, Restrictions on Mobility & Opening Hours
  • Virologists: Is the Variant
    a) More Severe i.e. leading to greater hospitalisations/deaths

    b) Vaccine Resistant/Evasive
  • Central Banks: Delayed Tapering & Rate Hikes?

Various sources have said that it will take around two weeks to get more data, including vaccine manufacturer BioNtech & U.S. infectious disease official, Dr. Anthony Fauci, who said "It clearly is giving indication that it has the capability of transmitting rapidly. That's the thing that's causing us now to be concerned."

He added that vaccines are expected to offer "a degree of protection against severe cases of COVID"

Plenty of scenarios to consider here.

The worst case is that the omicron variant proves more infectious, more severe and has the ability to evade vaccines.

Early reports focused on the large numbers of mutations in the variant, and a different type of spike protein that might render existing vaccines less effective. Barry Schoub, chairman of the Ministerial Advisory Committee on Vaccines in South Africa says that the mutations might actually be a good thing… The large number of mutations found in the omicron variant appears to destabilize the virus, which might make it less “fit” than the dominant delta strain.

So, might be good, might be bad. That cleared that up then!

Whilst the virus is dominating in the foreground, this scare will go some way to squash fears of a more aggressive withdrawal by central banks.

The Federal Reserve next meets on the 15th of December. Before omicron, many officials were supportive of a faster taper, and potentially an aggressive rate hiking cycle, which was already starting to weigh on equity markets.

The S&P drifted aimlessly through November…

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Now, it’s time to reassess.

Federal Reserve officials have until the end of the week to make their thoughts public before entering the pre-meeting blackout period. Market participants will be weighing the probabilities too.

Does this pullback represent an opportunity to Buy The Dip & rally into year end on the back of central bank policy remaining supportive for longer? Or is this to be taken as a cautionary tale?

Perhaps risks aren’t as non-existent as believed and the fiscal/monetary response won’t be as powerful if the variant leads to more restrictions on the global economy…

Keep an eye on the news!

Not investment advice. Past performance does not guarantee or predict future performance.

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