Futures in the United States are flat, while those in Europe are up after the Dow Jones Industrial Average gained nearly 560 points. Investors are likely recalibrating their investment strategies after reassessing the risks associated with the Omicron variant and weighing them against the Fed’s decision to expedite the tapering of its massive stimulus. Stock traders believe the new strain’s consequences will be short-lived and less damaging to the American economy. This is because corporate balance sheets are on solid footing, and investors believe that the United States will be able to navigate through this period unharmed.
In Tuesday’s session, the Dow Jones Industrial Average rose 1.60%, while the S&P 500 index jumped 1.78%. The Nasdaq, the tech-savvy index, surged 2.40% while the Russell 2000 climbed 2.59%.
The update on quarterly GDP, along with consumer confidence and existing home sales data, may cause volatility in today’s session. Existing home sales and consumer confidence data are important because they inform investors about how American citizens expect the economy to perform in the coming months. Similarly, GDP numbers can be used to assess how well the economy performed in the previous quarter after facing new challenges, and thus can be used to make informed forecasts on how the economy will potentially perform in the short term as well.
The price action of technology stocks was very positive in yesterday’s session, as investors took advantage of the opportunity to buy stocks of good companies while their stock prices were low. Investors saw a sharp retracement in the stock prices of travel-related companies, with United Airlines up 6.90% and Delta Airlines up 5.90%. The main motivation for investors’ interest in growth-oriented companies is that they are becoming accustomed to the new normal, in which new variants emerge from time to time, much like the flu. Thus, the only reasonable option is to quickly adapt and move forward with the ever-changing circumstances. This is most likely why companies’ positively correlated with economic reopening rose on Tuesday.
Another reason for the surge in investor confidence could be President Joe Biden’s reaffirmation that the United States will not impose strict lockdowns instituted last year. He did, however, urge Americans to get their booster shots as soon as possible because these vaccines will most likely provide good protection against the new strain of infections. Furthermore, he stated that the government is working on deploying about 1,000 medical personnel to help relieve the burden on hospitals and that 500 million coronavirus tests are being procured, which will be made available to Americans for free via a website in 2022.
Investors, on the other hand, should keep in mind that the American economy was able to successfully deal with the Delta variant because it was supported by dovish monetary policies, which pumped liquidity into markets and allowed investors to take on riskier assets. However, this will not be the case this time, and thus it will serve as a test for whether the US economy is finally strong enough to withstand the Omicron variant in the absence of accommodating monetary and fiscal policies.
Bitcoin, the king of cryptocurrencies, surged yesterday, mirroring the broader equity markets, as investors re-invested in risky assets. Bitcoin has been able to reclaim its position above the $49,000 mark. Previously, the price of Bitcoin dropped nearly 30% over a five-week period after reaching an all-time high of $69,000 at the beginning of November. Moving forward, we expect that the price of Bitcoin will surpass $50,000, a critical level, in January because historical data shows that the price of Bitcoin typically rises 10% in January. Having said that, investors should also keep in mind that volatility also rises significantly in January.
Oil prices rose yesterday as the American government appeared hesitant to implement strict lockdowns and tighten travel restrictions. Hence, the future outlook for crude oil demand is positive as economies carry on full steam ahead and get comfortable with the notion that new variants are likely to emerge in the future as well, and we should just try to mold our behavior to the new normal. Moreover, Moderna also provided some hope to investors that another jab of their vaccine is likely to provide protection against the Omicron variant as per recent laboratory findings.
Looking at the supply side, we can see that the reduction of oil production by OPEC+ jumped by 117% last month, compared to a 116% cut in October. This indicates that oil supply remains well below agreed upon targets. Hence, rising demand and falling supply are likely to support rising crude oil prices in the short term.
Treasury yields bounced back yesterday, with yields on 10 year Treasury bonds rising to 1.484% while the 30 year Treasury bond touched 1.894%. Gold prices usually move inversely to treasury yields and hence dropped below the $1,800 level. However, the price of the yellow metal is likely to remain volatile as investors adapt to updates regarding the Omicron situation and an aggressive Fed.
The U.S. dollar stabilised after falling as investors took the opportunity to book profits. The US dollar’s gains had been capped by an increase in risk appetite among investors, which resulted in the appreciation of riskier currencies such as the pound and euro.The British pound rose in value compared to that of the U.S. dollar and euro despite Prime Minister Boris Johnson’s warning that lockdowns could potentially be implemented to stop the virus from spreading.
Investors should note that despite the U.S. dollar struggling to gain momentum; it’s still likely to appreciate in coming months thanks to a hawkish Fed that is targeting ending its massive bond purchases by March next year and carrying out three interest rate hikes. When interest in a country rises, the demand for that country’s legal tender also increases, supporting an eventual increase in value of that currency.
Asian Pacific Markets
As a result of the positive Omicron news, Asian Pacific markets have also benefited from a boost in overall sentiment. South Africa, which was the first country to bring the new variant to the attention of other countries, is also reporting a sharp decline in daily cases, with infections reported at their lowest level in nearly two weeks.
As of 10.52 a.m. EST, the Nikkei jumped 0.11% and the Shanghai index hopped 0.01%. The Hang Seng index, in Hong Kong, surged 0.59%. The ASX 200 index slimmed 0.06%, and the Seoul Kospi rose 0.21%.