Omicron keeps the markets on its toes

Market Analysis /
Milan Cutkovic / 29 Nov 2021

HIGHLIGHTS:

  • A new coronavirus variant, Omicron, is keeping the markets on its toes and investors rushing towards safe havens
  • US Nonfarm Payrolls is the highlight of a busy week on the economic calendar
  • If you thought the sell-off in the stock market was dramatic, you haven´t been watching Oil prices closely enough

 

This week's key events:

Tuesday

  • Chinese Manufacturing PMI
  • Euro Zone CPI

Wednesday

  • Australian GDP
  • German Manufacturing PMI
  • Euro Zone Manufacturing PMI
  • US ADP Nonfarm Employment Change
  • US ISM Manufacturing PMI
  • US Crude Oil Inventories

Thursday

  • Australian Retail Sales

Friday

  • UK Services PMI
  • Euro Zone Services PMI
  • German Services PMI
  • US NFP
  • US Unemployment Rate
  • Canadian Employment Change
  • US ISM Non-Manufacturing PMI

 

Omicron will keep the markets on its toes

A new variant of the coronavirus, Omicron, has been identified in Southern Africa and officials call it “highly concerning”. While not enough is yet known about the variant, investors were quick to rush into safe havens. It also served as stark reminder that the pandemic is far from over.

So why is the Omicron variant so concerning? There are fears that the variant could be more transmissible than others, and that the vaccines available right now might not be as effective against it. While more research needs to be conducted to confirm this, the news alone was enough to spook markets. More travel restrictions could follow, and more European countries are already on the verge of another lockdown – something that could lead to another round of panic selling before Christmas.

What does this mean for markets?

The pressure on equities is likely to remain intact ahead of the festive period. The sell-off was not just triggered by the appearance of a new variant about which we don´t know enough yet, but also the fact that governments were rushing to impose new restrictions just as investors thought the worst is behind us. The market´s lofty valuation will be put to the test again.

The US500 broke below a key support level at 4633 points and a test of the 4550 level seems almost inevitable. Should the index fail to find support there, a correction towards 4270 points appears likely. 

Things are looking far more ugly in Europe, where several countries could be on the verge of another lockdown. We saw a massive sell-off in the Germany 30 that led to a daily close below the 200 DMA. While the RSI is hinting at oversold conditions, we’re more likely to see a dead cat bounce than the beginning of a recovery rally, given the current uncertainty and negative market sentiment.

 

US Nonfarm Payrolls

While the Omicron variant is likely to dominate the headlines in the new trading week, traders should not forget that we have a busy economic calendar ahead too.

The highlight will be Friday´s NFP release, where the headline figure should slightly beat expectations and arrive above the 500k figure. The ISM manufacturing and services reports should also confirm that the U.S. economy is still in high gear. The virus concerns will also lead to the market repricing the odds of the Fed aggressively hiking rates in 2022.

A strong NFP figure would give the Greenback a boost. However, traders might prefer to go long the Dollar against risk-on currencies such as the Australian and New Zealand Dollar should the current negative market sentiment prevail.

AUD/USD is already under pressure, but the Daily RSI is not signaling heavily oversold conditions yet, and the break below 0.7170 on Friday suggests we might see a test of the 0.70 level before the Aussie Dollar manages to bounce back.

 

Oil price crashes

If you thought the sell-off in the stock market was dramatic, you haven´t been watching Oil prices closely enough. USOIL plunged more than $10 on Friday, eventually finding support at the 200 DMA. The outlook for Oil has turned grim, as more restrictions and potential lockdowns will weigh on demand.

OPEC+ will meet this week to decide on their output and will likely remain cautious given the current uncertainty. Will this be enough to boost Oil prices? Probably not, but it could prevent a continuation of the sell-off and trigger a small recovery rally in the short-term.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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