Well, it feels like 2020 all over again. After rebounding sharply off their lows yesterday, US futures are sharply lower after Asian and European markets slumped overnight. Crude oil has retested the lows it had hit on Friday when prices slumped by $10. Sentiment is downbeat as fears over the efficacy of the Covid vaccines against the latest variant of the virus have intensified. Comments from the Moderna boss has cast doubt over whether existing vaccines would be able to work on omicron. If they are not effective, then it probably means more economic growth-choking restrictions and lockdowns until scientists find new vaccines.
Judging by the market’s wild swings, it is clears that more in-depth assessment of the new Covid variant needs to be carried out, before determining whether the economy is facing a major challenge in the coming months. Yesterday, investors assumed that Omicron may not be as bad as had been feared on Friday, and that vaccines may still prove effective. But that thesis has been tested and investors fear they may have got it all wrong, for otherwise the markets wouldn’t have fallen this much. It will take some time to understand this variant better, given how little is known about it. So, get used to this sort of volatility as investors continually take profit and buy the dips here and there, until there’s more clarity on the virus front, while also keeping a close eye on other macro developments. Expect choppy price action to continue over the next few weeks.
With Covid weighing on investor sentiment, investors are pricing out rate hikes from central banks that have become hawkish recently amid inflation upsurge, such as the Federal Reserve. Jerome Powell, the US central bank’s chairman will be talking later today. Investors have been piling back into US debt and out of the dollar in favour of the euro and yen etc. Powell may provide some insight into how the latest worries about the pandemic might influence monetary policy in the US. The key question is whether the Fed would still go ahead and taper its bond buying programme at a faster rate? The markets certainly don’t think so.
It is becoming clear that the market’s direction has now tilted to a more risk-off path. This means that we will likely see resistance levels holding firm after short term recoveries, while support levels are likely to break down one after another until something fundamentally changes. Pay attention to whether bullish signals will lead to any upside follow-through, or whether they prove to be traps and fail the bulls. Judging to the price action over the past couple of days, it is clear the bulls are becoming trapped. So, proceed with extra care until the markets print decisive bottoming formations.
