US indices recorded a strong rebound yesterday on expectation that omicron is more transmissible but less deadly, but the volatility remains high. That’s a sign that the stress in the market is not over just yet, because the root cause of the latest market selloff is not only omicron, it’s also the fear of seeing the markets left with less Federal Reserve (Fed) support due to Fed’s willingness to address the high inflation issue moving forward. And, that remains a major downside risk to the risky assets. The PE ratio for the S&P500 is at the highest levels in more than a decade, and the companies will have to fly with their own wings, or at least partly, when the Fed will be done giving out cheap liquidity. Also, the delta variant threatens the holiday activity, therefore a 2% jump in Boeing points that the latest gains may not be sustainable.
Chinese stocks
Chinese tech stocks will certainly have a bad day as there are news that they could be delisted from stock exchanges for not complying with Washington’s requirements to open up the books for scrutiny and tell the US regulators the percentage of share that are owned by a Chinese government entity, whether these entities have controlling financial interest and the name of each member of the Chinese Communist Party who sits on the board. It seems like if the Chinese tech giants like Alibaba and Tencent want to continue doing business in China, they may let go their American dream.
OPEC maintains supply hike, but warns it could change its mind at anytime
After days of speculation on what may come out of yesterday’s meeting, OPEC said it will go ahead with the supply hike as planned, meaning that they will continue adding 400’000 barrels of extra oil per day from January. But, they could revisit the decision at any moment if the omicron becomes a meaningful threat for global oil demand. US crude rebounded after hitting $62 per barrel yesterday, energy stocks jumped near 3% in the US, as well. The next important test for the short-term direction will be the $70-71 offers, where stands the 200-DMA and the major 38.2% Fibonacci retracement which should distinguish between the actual negative trend and a short-term bullish reversal.
At this point, it’s quite hard to tell where we go in terms of risk sentiment. We started the week with a terrible headache due to omicron, and now we hear less bad news regarding this latest strain, so the risk appetite is not restored, but it is clearly getting better. However, no one could rule out one bad news, and everything goes back to red. And there is another thing that the risk sentiment ignores since the arrival of omicron, it’s the fact that the delta cases are surging and remain the main problem of the moment. Therefore, no matter what omicron will become, the surge in delta cases could hit the activity for this holiday season, especially travels.
Is NFP still important?
Today’s NFP data is important, but it is not as important as when the Fed focused on improving the health of the US labour market. There is a chance that today’s data won’t matter much for the Fed expectations, unless we see a surprisingly weak number that the Fed could not ignore. But we also know that even with a weak number, the Fed can’t do much to improve the labour numbers, as it needs to deal with inflation; it has its hands tied.
So, the worst-case scenario for the market mood would be a meaningfully low NFP number combined with hawkish Fed expectations. But that’s not the consensus. The expectation is that the US economy added 550K new nonfarm jobs in November, slightly more than last month’s 530K. It is also in line with the ADP figure printed on Wednesday, which was around 530K.
A strong read on the other hand should be perceived as good news for stock prices, given that whether we see a soft or a strong NFP read, the Fed will need to pull back support in the coming months; a strong number would at least mean that the economy needs less help.
