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Risk appetite returns as Omicron fears recede

Lawrence Kaplin
Lawrence Kaplin 08 December 2021

GBPUnderperforms

EUR: Economic sentiment turns negative

USD: Yields rise

Sterling

Following US Chief Medical officer Fauci’s comment on Omicron “it does not look like there’s a great degree of severity” and the surprise Chinese monetary stimulus announcement, risk-on markets powered higher again yesterday.

US equities rose the most since March and enjoyed their best two-day run of the year, recouping all Omicron led losses.

Oil also joined in on the party, rising 4% on the day, taking its two-day bounce to over 12%, as did the riskier currencies like the AUD and CAD rising over 1%.

Notably, the turnaround in market sentiment failed to lift the normally risk inclined pound as a combination of growing scepticism that the MPC will raise interest rates next week and concern that the UK may need to increase Covid restrictions.

In contrast to Fauci, UK health secretary Sajid Javid, told reporters “the new variant could knock us off the road to recovery”. Reports in today’s Telegraph newspaper of the UK government considering a Christmas work-from-home -order will only add to the uncertainty surrounding Sterling.

There are no economic releases scheduled for today.

 

Euro

Eurozone final Q3 GDP released yesterday confirmed previous readings, but the closely watched German ZEW economic Sentiment index unexpectedly turned negative. The recent EZ economic slowdown, combined with an increase in Covid restrictions across much of Europe are starting to take their toll. With the ECB forecast to be the last of the G7 countries to raise interest rates, the EURO continues to be shunned in favour of its higher-yielding counterparts and remains trading close to 2021 lows.

There are numerous ECB members slated to speak today including President Lagarde.

 

US dollar

Despite the huge risk-on moves we have seen over the last 48 hours, the normally risk averse US Dollar has held steady. Ahead of next week’s FOMC meeting, increasing expectations of an earlier than forecast rate rise and an inflation number that could well hit 7% when figures are released Friday, are keeping the $ trading to close to 2021 highs. There is a growing feeling amongst many market participants that the Federal Reserve are falling behind the curve, and thus will need to act sooner and more aggressively when it comes to controlling inflation.

Mortgage applications are due to be released at midday today.

 

Elsewhere

The broad risk-on mood helped lift commodity currencies yesterday. The AUD in particular was a notable outperformer rising over 1.2% as the RBA struck a more hawkish tone at their latest meeting. With such close trading ties to China, AUD traders will have a keen eye on tomorrow’s Chinese inflation data where the forecasts are for November inflation to rise 0.3% and an annual rate of 2.5%.

 

Market reports

Today's Interbank Rates at 07:45am against sterling movement vs yesterday.

Euro €1.173 ↓
US dollar $1.324 ↓
Australian dollar $1.857 ↓
South African rand R20.97 ↓
Japanese yen ¥150.1 ↓

 

Have a great day.