Despite COVID-19's dominance again, the markets are recovering from last week's sell-off
Traders can use technical, sentiment, and fundamentals to come up with a trading idea. Currently, the sentiment around the Omicron variant is confused. The technical suggests it was a holiday market sell-off under thin volume, but the fundamentals are worse this week than they were last week. So, until we get some new hard evidence of how bad things can get with the new variant we should err on the side of caution.
Market Wrap
The major US stock markets surged at the opening of the session as COVID-19 vaccine makers Moderna, Pfizer, and Johnson & Johnson began reviewing their vaccines' effectiveness against the recently registered variant of the Coronavirus, Omicron. According to Pfizer CEO Albert Bourla, Paxlovid, the company's COVID-19 drug, will be effective against the newly detected Omicron strain.
The VIX (Volatility Index) is also commonly known as the fear index and as it rose sharply on Friday there was a move out of the riskier assets including equities. Today’s reversal in the VIX is suggesting that fear is coming out of the markets, but with the thin volume on Friday, volatility was always expected to be higher. So, it could be just the normal volumes returning to the markets and the ranges getting smaller.
World leaders and administrations have already begun addressing their nations with regard to the new measures that they are going to impose, as a way of slowing the spread of the new variant. Today in the UK, Health Secretary Sajid Javid said the UK will not "keep [the virus containment] measures in place for a day longer than necessary." President Joe Biden prepares to address the USA on the Omicron mutation later today and German Chancellor Merkel is talking to the heads of the German Federation alongside her successor Olaf Scholz.
The DAX is teetering on the possibility of a break-in major structure. If the swing low at 14885 is broken there could be a deeper retracement, possibly after the old support is tested as resistance.
For market watchers, the US President is followed by Federal Reserve Chair Jerome Powell, who recently secured his position for a second term. I anticipate a lot of information about climate change from him as he will be speaking on a webinar about food security within the USA. During his testimony tomorrow, Chair Powell will have to defend the FOMC's stance on inflation, interest rates, and how COVID-19 is causing them added headaches and their proposed responses. So, these initial remarks and questions could be market moving.
Initial data on the Omicron variant suggest it is no more of a concern than the Delta variant, so the health services may not be overwhelmed. There was a sharp sell-off on Friday due to thin holiday markets, end-of-month book squaring, and fear over the South African variant. If the Omicron variant is deemed less dangerous than first feared, we could get a sharp rebound.
There are still plenty of unknowns and scheduled news on the calendar with the focus on the ISM manufacturing survey on Wednesday and then the end of the week's November NFP report on Friday.
According to the National Association of Realtors (NAR), the US pending home sales increased by 7.5% in October compared to the previous month. The Pending Home Sales Index (PHSI) was 125.2 in October. Year-over-year, it declined 1.4%. "Motivated by fast-rising rents and the anticipated increase in mortgage rates, consumers that are on strong financial footing are signing contracts to purchase a home sooner rather than later. This solid buying is a testament to demand still being relatively high, as it is occurring during a time when inventory is still markedly low," NAR's Chief Economist Lawrence Yun commented.
It was a similar story this morning from the UK with the UK’s mortgage lending approvals dropping after the stamp duty holiday came to an end. Net borrowing of mortgage debt in the UK dropped to £1.6 million in October, the lowest in 3 months.
The pound came under pressure this afternoon but is still trading above the critical lows. There is a good chance that today’s price action has left a double top and some liquidity above 1.3365. If that is true and this support holds, we could accelerate higher on a break of today’s high.
The US dollar index is likely to be the major barrier in a rising cable if the US dollar catches a bid before breaking below $95.50 and the recent balance area. The Fed speakers this week will give the markets more of an indication of whether they are going to pull back from the faster tapering that had been mentioned before we knew of Omicron.