The news likes to keep you on your toes and risk is everywhere when there is a holiday atmosphere and light volume. Just as we were getting used to the markets going one way, along comes something to tip it all on its head. Look for anything risky to drop, but if lockdowns are mentioned the tech and stay-at-home stocks could do well.
It’s oh so quiet, and so peaceful until…
COVID-19 rocks the market with a new variant. The trading day yesterday was very tame, with ranges from the previous sessions acting as boundaries that traders respected. So, it took an element of fear to move the needle, not a central banker. UK Health Secretary Sajid Javid said from 12:00 GMT on Friday six countries would be added to the red list, with flights being temporarily banned. The BBC website cited one unnamed expert who described the variant, known as B.1.1.529, as "the worst one we've seen so far", and there is concern it has the potential to evade immunity. Yet no cases have been confirmed in the UK.
Anyone who has been an avid reader of these reports will have an inclining that the US dollar has been rising on expectations of a rate hike sometime in 2022. The FOMC led by Fed Chair Powell has repeatedly said that if inflation stays above the target level for a prolonged period and the labor market is back to what they consider full employment, the Fed will then raise rates. There has recently been talking of the tapering being sped up, so they could get to the final I and T to be dotted and crossed before raising rates. Yet, if there is a new more deadly, vaccine evading, strain of COVID coming to get us, the likelihood becomes the lockdowns will come back, the economy will stop, and the stimulus will be fired up again. Rather than tapered away.
If there is no other good news, inflation news, or jobs news out today, we should expect the B.1.1.529 story to denominate what is already a very thin, volatile, market.
The UK’s actions to ban flights and impose quarantine measures may have given the pound a boost at the London open today, but the greenback is the main mover in this pair currently. It just so happens that cable nearly touched the lower bound of a descending channel, and in my view, descending channels eventually break to the upside. So, we should look for signs of a reversal into December.
The forex heatmap is moving to the familiar risk-off but with a mixed result so far for the US dollar. Clearly, we need to be selling commodity pairs and buying safe havens like the yen and Swiss franc.
Major European and Asian markets have fallen, and US stock futures point to sharp losses at the open as investors unload risky assets. The energy market is likely to suffer heavily as global lockdowns and movement restrictions could adversely affect demand.
The Biden administration will be loving this chart, especially if the price of Brent gets down to the double bottom at $64.50-$64.00 per barrel. Regardless of the new variant and all the damage it will do, lower energy prices will cover the SPR release debacle.