Omicron plays with investors’ nerves as stimulus vanishes

Stock markets were in a sea of red during mid-European trading hours as omicron concerns and tighter curbs in Europe reminded investors that the pandemic is far from over and Covid could still swamp global demand after two years of limbo.

The pan-European STOXX 600 and the British FTSE 100 index followed their Asian counterparts deeply lower, with energy shares, basic materials, and consumer cyclicals driving the bulk of losses, plunging by 2-3%. Wall street is currently joining the bearish camp, with the S&P 500, Nasdaq 100, and Dow Jones retreating by more than 1.0%.

With major central banks setting the roadmap for a tighter monetary policy in order to put inflation on a leash and governments showing no interest to open their liquidity taps once again, the year ahead could be challenging for businesses, especially if supply constraints persist and vaccines’ efficacy diminishes.

Even Biden’s build back better $2 trillion package is in question now as Senator Joe Manchin pulled his support for the bill on Sunday after months of drafting and revising. The legislation promises to subsidize childcare costs, lower prescription-drug costs, and provide tax discounts for carbon emission reductions, but Manchin’s objection could imperil Democrats’ efforts to bring together their thin congressional majority.

That said, stock markets have proved to be quite resilient against lockdowns, quickly resuming their record rally despite the shard declines. Hence, as stock indices tank, investors may look to buy the dips once again.

Risk-sensitive currencies tumble to recent lows; US dollar, euro find some footing

In the FX space, the cautious mood brought some damage to risk-sensitive currencies such as the antipodeans and the commodity-dependent loonie. Likewise, the pound could not sustain the Bank of England’s rate hike boost, drifting lower to test its 2021 bottom of 1.3160 against the US dollar as Boris Johnson is expected to say that all possible restrictions will remain on the table when the Cabinet gathers today at 14:00 GMT.

On the other hand, the emerging containment measures in several European countries did not scare the euro much. Euro/pound shined brightly, rising as high as 0.8544 before easing a bit. Euro/yen and euro/dollar rebounded to a smaller extent following Friday’s tumble after the German Finance Minister provided assurances that social activity should remain and hard lockdowns should be avoided.

Meanwhile in the US, the rising omicron infections in New York are not threatening any lockdowns yet, but the bond market, which is considered a shelter for funds during times of market turbulence, could still attract some demand, sending the 10-year Treasury yield closer to its recent lows.

While falling yields tend to negatively affect the US dollar, the greenback managed to hold afloat against a basket of major currencies this time. Dollar/yen stood flat around 113.53, while the battered loonie, which got punched from melting oil prices, helped the dollar to crawl up to last week’s high of 1.2935.

Noteworthy is also the dollar’s rally against the Turkish lira, which extended its record rally to uncharted waters, peaking at 17.83 today as inflation continues to run wild in Turkey.

Gold keeps stubbornly testing the $1,800/oz resistance after its quick bounce from a two-month low.

RBA meeting minutes next on the calendar

The calendar will be light of key data releases in the coming sessions. Therefore, developments around the omicron variant and lockdown announcements could be the only market moving factors just before the holiday season starts.

Minutes from the RBA’s December policy meeting will be the only highlight in central bank events early on Tuesday at 00:30 GMT, with traders looking for a more detailed reasoning behind its upbeat economic prospects.

Aussie/dollar was last seen marginally lower at 0.7115 after a flash drop to 0.7080.