Stock markets rebound as omicron risks fade for now

Morning Note

Strong gains for European markets this morning mirror a very positive session on Wall Street and a positive handover from Asia. Risk appetite is improving as evidence incrementally supports the case that the omicron variant will be less damaging to the economy than was supposed at the end of November. Traders and investors start to get twitchy about missing out a Santa rally around this time of year, but bad omicron news could emerge in the meantime. However I would stick by my original commentary that this was likely to be overblown and provide some useful resetting of expectations for the market to rally.

Markets flushed out at the first sign of omicron, but now are more confident it won’t be as bad as first feared. There will still be restrictions on liberty for no good reason, and therefore potential growth, but as we have consistently seen during the pandemic, economic sentiment does not equal market sentiment. Even though the Federal Reserve is in a very different place to this time last year, there is enough strength and depth and liquidity at the moment to absorb 5-7% drawdowns without too much fuss. And whilst omicron news is risk-on right now – risk-on from oversold levels that is – we shouldn’t ignore the impact of a central bank. Yesterday’s decision by the People’s Bank of China to cut the reserve requirement ratio by 50 basis points amounted to no small amount of easing, and clearly boosted risk appetite across the piece.

The FTSE 100 recovered above 7,300, where it was before the omicron-led sell-off on Friday Nov 26th. Bullish MACD crossover in the offing here on the daily chart also encouraging.

FTSE 100 Chart 07.12.2021

Wall Street rallied across the board with the S&P 500 up +1% and the Russell 2000 up over 2%. Energy, financials and reopening stocks doing well. The S&P 500 has now recovered about half of the pullback from the recent ATHs. Support emerged around the 50-day moving average as it has done all year. Crowded software, momentum type stocks still under pressure but the rotation trick still working its magic to keep the broad market afloat. Volatility has collapsed with VIXX back down to earth this morning with a 23 handle. Yields rose with the long end up by the most in a month on Monday. The US 10yr Treasury note yield advanced to 1.45%, up about 10bps from Friday. Oil is higher as the market dials back some of the worst-case-scenarios for omicron and sellers admit that the move lower was deep and quick enough to suggest it was overdone. WTI trades around $71 and sniffing around the 38.2% retracement of the recent top-to-bottom swing lower. Momentum with bulls at last but unclear whether there is enough here to see a recovery to $75-80 range yet.

Oil Chart 07.12.2021

Elsewhere…

The sheriff is back in town: Yesterday news broke of separate SEC investigations into a number of large cap companies.

First up was Tesla – about time you say – but it’s so far only related to solar panel defects following the whistleblowing of Steven Henkes, a former Tesla employee. Shares fell heavily initially, dipping into bear market territory – 20% off the all-time high struck last month, just before Musk began selling his stock – before paring losses to trade almost flat for the day, down just 0.6%. Well this is fine and all but what we really want is an investigation into Tesla’s marketing about its supposed full self-driving product.

Meanwhile, Trump’s new social media platform SPAC, Digital World Acquisition Corp, said it’s being investigated by both the SEC and FINRA. Shares in DWAC fell over 2.5% but rose 6% after hours. Finally, Lucid shares fell sharply after disclosing an SEC probe into disclosures made as part of its SPAC listing this year. Initially plunging over 10%, Lucid finished the day down 5%.

In FX it all remains a bit choppy with no clear direction for either the euro or sterling against the dollar. EURUSD is trending lower to 1.125 having had the 1.14 area firmly rejected last week at the 20-day SMA.

GBPUSD is hovering around 1.3250, sliding still along the bottom of the channel without much willingness to pick itself up. Very tentative signs it could be basing ready for an ascent as the MACD starts to show sellers being a bit tired and could be forming a potential bullish crossover. Just maybe looks oversold here. If by the time of its next meeting the Bank of England thinks that a) omicron isn’t that bad and b) the labour market has emerged from furlough in fine shape, then it might still go for a hike.

GBPUSD Chart 07.12.2021