The market calmed on Monday after the shocking massive moves that followed the detection of a new Covid variant last week. Investors looked for cover thus exiting risk assets. Going into the new week, market participants will know how intense the new variant is. Many of the vaccine producers are expected to run new tests against Omicron, as the new variant is called.
A variant like Omicron is not what the world needs now. South Africa was the first to detect and alert the world of the new variant last week. The market was shocked and risk assets fell off. Equities, which looked overbought prior, got the right trigger and couldn’t hold back. The S&P 500 fell close to 3% on Friday to close the week red. European markets were hit even harder as Omicron has since been detected in Germany and the UK. The UK 100 Index fell nearly 3.7% on Friday. The Asian markets were less hit though but the Japanese Nikkei shed 2%.
As for the FX market, all the major risk FX – Aussie, CAD and NZD fell sharply. On the other hand, safe-haven JPY and CHF were the most preferred as they both took a massive bullish run-off. The dollar, on the other hand, was resistant to the risk-off sentiment. The greenback recorded what was its biggest one-day loss in 2021. The market feared that the new Omicron variant might delay further Fed tightening expected later in the year. The biggest FX movers last week, especially in the second half, were sentiment FXs like AUDJPY, CADJPY, NZDJPY, AUDCHF, NZDCHF and CADCHF.
As for commodities, the oil market was hit the hardest – just as expected. The commodity has been on a bearish correction since late October and the new variant has got it worse. WTI closed last week below $70 for the first time in two months. Most commodities fell, including Gold which eventually ended last week at -2.9% dip.
The Week Ahead
Omicron Development
At the start of the new week, different asset classes that were driven last week by the variants are making significant retracements early on Monday. So far, the variant has been detected in South Africa, Germany, the UK, Australia, Canada and Hong Kong. Some of the major countries have already started closing borders while they run internal investigations. The US government is expected to respond on Monday.
Also, the major vaccine manufacturers will run fresh tests to determine whether the current vaccines can deal with the new variants. This might take a week or two according to reports. Therefore, the early Monday retracement might be a ‘calm before the next storm’. The market will be driven by Omicron-related headlines this week – dovish or hawkish. The risk-off sentiment will persist if the US policymakers join the panic. Traders should therefore prepare for some volatilities anytime this week.
Macroeconomics
The high-impact macroeconomic releases will add to the week’s expected volatility. On Monday, the Bank of Canada Governor will speak at a symposium jointly hosted by the bank and its counterpart in New Zealand.
On Tuesday, we have the CAD monthly GDP figures and testimony from Fed Chair Powell who has just been re-nominated by President Biden. He might be asked questions about how the bank will respond to the new virus variant.
On Wednesday, Aussie quarterly GDP, US ADP employment figures, BoE Governor’s speech and the US ISM Manufacturing PMI figures will be watched closely as Fed Chair completes its testimony before the Senate Banking Committee.
On Thursday, the OPEC+ committee will meet. This is expected to be one of the most important meetings in recent time. Market participants will study closely how the Oil cartel responds to the recent intention of the US to release 50 million barrels of Oil into the market amid the current variant of the virus that could cut down demand. Their response amid the risk sentiment at the time will determine the near-term direction of the energy market.
On Friday is the big Non-Farm Payroll and employment rate report from the US. At the same time, equivalent CAD Job Reports will be released to close a very loaded week. Less than 2 hours after, US ISM Services PMI will be released.