Futures in the United States are trading higher while those in Europe are lower after we were bombarded by a hawkish Fed on Tuesday. Fed Chair Jerome Powell stated that it does not seem right to describe the persistent rise in consumer prices as “transitory”. Hence, to curb ever-growing inflation, the Federal Reserve is thinking of speeding up its tapering of bond purchases despite emergence of the Omicron variant. After Fed Chair Jerome Powell’s remarks, the Dow Jones Industrial Average shed nearly 650 points as investors started panic selling.
Thus, the end of November was marked by bears hijacking stock markets and major indices closing in the red for the month. Last month, the S&P 500 fell 0.8%, and the Dow fell 3.7%, resulting in losses for the last two months in a row. Similarly, the Russell 2000 dipped 4.30%, while the Nasdaq, the tech-heavy index, jumped 0.25% in November. Despite the bloodshed in the stock markets, investors should keep in mind that the major stock market indices are still showing positive year-to-date gains, with the S&P 500 up 21.60%, and the Dow up 12.7%. Similarly, the Nasdaq index is up 20.6% in 2021.
Moving forwards, the major factor affecting stock market sentiment would likely be how the Omicron variant would likely affect the American economy. Today, investors will be focusing on remarks by Fed Chair Jerome Powell and Treasury Secretary Janet Yellen before the House Financial Services Committee in Washington. Moreover, stock traders will also be digesting a set of economic reports such as ISM’s manufacturing data, manufacturing PMI for November, and ADP’s payroll data. According to a Dow Jones survey, 506,000 jobs are expected to have been added last month, which is lower than the 571,000 jobs gained in October.
Major stock market indices took a nosedive after Fed Chair Jerome Powell indicated that the Federal Reserve now believes it needs to speed up winding down its unprecedented quantitative easing measures in order to tackle inflationary pressures. According to him, this will likely be the major agenda item of the Fed’s meeting this month.
Earlier, the Fed communicated that it would keep the pace of tapering at $15 billion per month, but this number is now likely to be increased. Earlier, the Federal Reserve also indicated that it would not start increasing its interest rates until tapering is fully completed. Hence, with the Fed’s new intentions, interest rate hikes are also likely to occur sooner than initially anticipated. Investors should understand that the hawkish shift tells them that the Fed is more worried about inflationary pressures than the risks associated with the new coronavirus variant. As a result, the volatility index grew at its fastest rate since February 2020.
Due to the update by the Fed Chair, the Treasury curve flattened significantly, which means that the gap between five-year bonds and thirty-year bonds is narrowing. The yield on 10-year treasury notes fell beneath the 1.45% mark, dipping nearly 8 basis points.
Moving forward, stock traders should keep in mind that the Omicron coronavirus variant is likely to have the biggest influence on stock markets as we still do not know much about the new strain of cases, and how it would affect government policies around the globe. The CEO of Moderna spooked investors by stating that he expects the current vaccines to have lower effectiveness against the Omicron variant. However, the chief of BioNTech indicated that the current vaccines will likely reduce the severity of the disease.
Following the Omicron news and the Fed Chair indicating the speed up of tapering, prices of cryptocurrencies have also taken a beating, with Bitcoin, the king of cryptocurrencies, currently trading around $57,200 after falling from unprecedented highs. However, investors should note that the second largest digital coin, Ethereum, is outperforming Bitcoin since its launch in 2015.
Since December, Ethereum has gained about 530% compared to Bitcoin, which has doubled in the same period. However, it is important to note that Bitcoin’s valuation is still nearly twice that of Ethereum. The distinguishing factor between the two digital coins is that Ether is more positively correlated with sectors growing in the blockchain space, such as decentralised finance and non-fungible tokens. On the other hand, the price action of Bitcoin is more closely linked to inflation and currency trends around the world.
Oil prices fell on Tuesday after Moderna’s CEO stated the potential inefficacy of current vaccines against the new Omicron variant. Because of his remarks, the future outlook for oil demand seemed gloomy. If the situation worsens and cases spike in coming days, governments may be forced to implement lockdowns and tighten controls. However, it is still very much unclear how effective the current vaccines are and whether the new variant is as detrimental as medical professionals initially believed it to be,
With the demand outlook hazy at best, we expect OPEC+ to halt its initial plan of adding 400,000 barrels a day in January 2022. Even before the Omicron news, the cartel was under a lot of pressure to revisit its strategy as nations moved to tap into their strategic reserves. Today investors will be looking at the oil stockpiles data to understand how oil demand has been acting out over the last week and infer how oil prices may fluctuate in coming weeks.
The Fed’s hawkish stance pushed down investor sentiment related to the precious metal as a quicker pace of tapering would mean sooner than expected lift-off of interest rates. Higher interest rates make the yellow metal less appealing to investors because of the rise in opportunity cost. Over the next few days, the major driver for gold prices is likely to be updates on the Omicron variant. This is because gold is considered to be among safe haven commodities protecting wealth of individuals during times of higher volatility and uncertainty.
Asian Pacific Markets
Asian Pacific stock markets have broadly been on a rise today despite factory data in China declining, as can be seen from the Purchasing Managers’ Index by Caixin/Markit falling from 50.60 in October to 49.90 in November. As of 01.10 a.m. EST, the Nikkei jumped 0.76% and the Shanghai index hopped 0.11%. The Hang Seng index, in Hong Kong, rose 1.40%. The ASX 200 index fell 0.14%, and the Seoul Kospi climbed 2.17%.