Powell pivot and variant volatility: a potent mix
It’s an exceptionally volatile time in markets at the moment with Omicron headlines now battling for centre stage with a more hawkish US Federal Reserve. Depending on how bad the new variant is, the shift by Fed Chair Powell yesterday could have longer-term consequences.
Markets are relatively buoyant this morning with Asian equities and US futures in the green. Conflicting Omicron news has also added to the whipsaw price action we have seen recently. The dollar is currently treading water after sharp moves yesterday, while US 10-year bond yields are endeavouring to get back to 1.50%.
Fed ups the ante
Fed Chair Powell officially (and finally) did an about-turn on the long-held contention that inflation would be “transitory” in his speech before the Senate Committee yesterday. He surprised many by saying that it was now time to “retire” the “t” word, arguing that new Covid outbreaks are inflationary in nature. He further expressed confidence that the impact of Omicron will be far less than in the spring of 2020. Powell went on to say that it could be appropriate to increase the tapering pace so that bond buying ends a few months earlier.
The timing of this new risk assessment is especially significant with it coinciding with the outbreak of the potentially dangerous Covid-mutant Omicron. An announcement about a faster taper of asset purchases is expected at the Fed meeting in two weeks (Omicron-dependent), which implies a potential first rate hike in springtime next year. The market currently only prices in around 55bps of rate hikes for the whole of 2022, but many Fed watchers now see three rate rises with the first as early as March.
Conflicting Omicron headlines
Traders are also being hit with headline havoc regarding the latest new around the new Covid variant. Both AstraZeneca and Pfizer/BioNTech have recently sounded less concerned about Omicron than the Moderna CEO did. Investors were unnerved yesterday by warnings form Regeneron, the maker of an antibody drug for Covid-19, that early tests indicated that the new variant could hamper the effectiveness of its treatment.
Yet, this morning the Israeli health minister is being cited as reasons for more optimism as he believed vaccines may offer protection against Omicron.
Volatile, seasonal markets
We expect market volatility to continue into the new year. Although many trading desks may have stopped taking on new risk positions after the Thanksgiving holiday, price action will remain whippy as various headlines hit our screens. Remember that three major central banks meet in two weeks time, with the Fed, ECB and Bank of England all set to decide on policy.
FX volatility for the majors is now on its highs for the year, and it’s very easy to see why. The Vix, Wall Street’s fear gauge, notched its biggest monthly surge since February last year. The dollar is currently trading around 96 on the DXY, having seen wild price action yesterday. With the Fed now in play, dollar dips against high yielding currencies should prove shallow. Support in the Dollar Index sits at yesterday’s low at 95.50 or 1.1382 in EUR/USD. We have ADP as forerunner to Friday’s US monthly jobs report to look forward to as well.