Equities Slide on Fresh Omicron Concerns, as Fed Decision Looms

Stock indices were a sea of red yesterday, with the negative appetite rolling into the Asian session today as well, perhaps after the UK reported its first death from the Omicron coronavirus variant. Investors may have also reduced their risk exposure in anticipation of the FOMC decision scheduled for tomorrow.


The US dollar traded higher against all the other major currencies on Monday and during the Asian session Tuesday. It gained the most versus AUD, CAD, and NZD, while it eked out the least gains against JPY and CHF.

The relative strength of the safe-havens dollar, yen, and franc, combined with the weakening of the risk-linked Aussie, Kiwi, and Loonie, suggests that financial markets traded in a risk-off fashion yesterday and today in Asia. Indeed, turning our gaze to the equity world, we see that major EU and US indices were a sea of red, with the negative sentiment rolling into the Asian session today as well.

Investors may have turned cautious again after the United Kingdom reported its first death from the Omicron coronavirus variant. Deaths from the new strain may have occurred in other countries as well, but there was no official confirmation outside the UK yet. Remember that last week, equities rallied on news that the symptoms of the Omicron variant are not as severe as previously thought, but although we saw decent chances for some indices, especially the US ones, to enter uncharted territories, we were reluctant to call for a long-lasting advance. We specifically noted that headlines pointing to more severe symptoms of the Omicron variant are likely to result in stress and anxiety again, and thereby another round of risk-aversion. This is what happened yesterday, and bearing in mind that news surrounding covid have the potential to move the markets in either direction, we prefer to turn to the sidelines for now.

Market participants may have also reduced their risk exposure in anticipation of the FOMC decision scheduled for tomorrow. Following the hawkish appearance of Fed Chair Powell before Congress a couple of weeks ago, investors are now expecting the Committee to remove the “transitory” wording with regards to inflation from the statement, and also signal a faster tapering process. Such a decision is hawkish by itself, but given that it is already anticipated, we don’t believe that it would be the main catalyst behind the dollar’s reaction. We believe that it may be the updated “dot plot”. According to the Fed funds futures, the financial community anticipates the first post-pandemic rate hike to be delivered in July next year, while it factors in another one before the end of the year. Therefore, the new “dot plot” needs to point to two or more quarter-point increases for next year in order for the US dollar to gain. This could affect the broader market sentiment as well, and thereby other currencies besides the US dollar. Some currency pairs we expect to experience some volatility despite not having the US dollar in the equation are AUD/JPY, AUD/CHF, NZD/JPY and NZD/CHF. In other words, pairs that consist of a risk-linked currency and a safe haven.


The UK FTSE 100 index traded lower on Monday, breaking below the upside support line drawn from the low of November 30th. That said, the slide was pause near the 7225 level, still above the prior downside resistance line drawn from the high of November 12th. As long as the index is trading between those two lines, we would stay sidelined.

In order to start examining whether the outlook has darkened further, we would like to see a clear dip below 7180, a support marked by the inside swing high of December 1st. The price will already be below the aforementioned downside line and the bears may get encouraged to push the action towards the low of December 3rd, at 7090. If they are not willing to stop there, then we could see them pushing towards the low of December 1st, at 7025.

On the upside, we would like to see a clear rebound back above 7325 before we start examining whether the bulls have gained full control again. This will take the index above the upside line taken from the low of November 30th, and could aim for the 7370 or 7397 zones, marked by the highs of December 9th and 12th, respectively. Another break, above 7397, could see scope for extensions towards the peak of February 21st, 2020, at around 7460.


AUD/CHF traded slightly lower, after hitting resistance at 6630 on Friday, a barrier also marked by the high of November 29th. Overall, the rate remains below the downside resistance line taken from the high of October 27th, and thus, we would see more chances for the upcoming wave to be a negative one rather than an upside.

Nonetheless, we prefer to wait for a confirmation break below the 0.6525 barrier, marked by the low of November 30th, before we get confident on further declines. Such a break could pave the way towards the low of December 3rd, at 0.6417, the break of which may see scope for declines towards the 0.6315 zone, marked by the low of May 22nd.

We will start examining the bullish case only if we see a strong rebound back above 0.6695, a resistance marked by the inside swing lows of November 11th and 19th. This could confirm the break above the downside resistance line taken from the high of October 27th, and may initially target the high of November 24th, at 0.6760. Another break, above 0.6760 could see scope for advances towards the peak of November 16th, at 0.6812, which if violated as well could encourage the bulls to climb towards the peak of November 2nd, at 0.6860.


During the early European morning, we already got the UK employment report for October. The unemployment rate ticked down to +4.2% from +4.3% as expected, but the net change in employment revealed less jobs than anticipated. Average weekly earnings, both including and excluding bonuses, have slowed by less than forecast. In any case, the report passed unnoticed as GBP-traders may have been keeping their gaze locked on Thursday’s BoE meeting.

Later in the day, we have the US PPIs for November, and similarly to the CPIs, they are expected to have accelerated further.

Tonight, we get New Zealand’s current account balance for Q3, while RBNZ Governor Adrian Orr will hold a speech.


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