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Markets gripped by Omicron menace

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By Lukman Otunuga, Senior Research Analyst at FXTM

A wave of risk aversion upset European markets on Tuesday as concerns over the effectiveness of existing Covid-19 vaccines against the Omicron virus left investors on edge.

US equity markets were in the red, while bond yields have fallen as market players fled from riskier assets to safe-haven destinations. The Omicron variant has hijacked the headlines, roiled global markets and darkened the overall mood.

A growing number of countries have reported confirmed cases of the variant, including the United Kingdom, Germany and Hong Kong. This has led to oil being one of the biggest casualties with prices collapsing last Friday and limping into the new week under renewed pressure.

Caution certainly remains the name of the game, and this may see stocks remain depressed as the new virus in town overshadows economic data. Nevertheless, Omicron uncertainty coupled with other key events this week like the OPEC+ meeting and US jobs report could result in explosive levels of volatility over the next few sessions.

 

Dollar weakens despite risk-off mood

The dollar has depreciated against almost every G10 currency, despite the risk-off sentiment stimulating appetite for safe-haven assets. Weakness in the dollar may be attributed to action in bond markets with Treasury yields on a slippery decline below 1.50%.

Fed Chair Jerome Powell testified before the US Senate Banking Committee on Tuesday afternoon.

In prepared testimony ahead of his appearance, Powell said the Omicron variant posed risks to both sides of the central bank’s mandate. Essentially, it could impact both growth and inflation, and with it the US economic recovery, ultimately affecting the Fed’s tapering timeline and future rate hikes.

Looking at the technical picture, the Dollar Index has shed over 0.5% with prices approaching the 95.52 level. A solid breakdown below this point could open the doors towards 95.00.

 

No love for oil ahead of OPEC meeting

Brent crude is struggling to nurse the deep wounds inflicted from last Friday’s brutal selloff, with prices extending losses in the new trading week. Crude shed almost 4% on Tuesday as concerns over the new Covid-19 variant weighed heavily.

Given how the Omicron variant has triggered fresh travel restrictions, this does not bode well for the demand outlook at a time when Covid cases have been rising in Europe.

The main risk event for oil will be the OPEC+ meeting on Thursday. It’s worth keeping in mind that the cartel already agreed at its last meeting to increase output by 400,000 barrels per day in December, so any decision made this week will likely take effect in January production levels.

There is speculation around the cartel halting its planned supply increase in January. Whatever, the outcome of the meeting it will certainly have an impact on oil which has lost over 16% in November.

 

Commodity spotlight – Gold

Gold was back in fashion on Tuesday as Omicron virus fears accelerated the flight to safety. A weaker dollar and falling Treasury yields supported upside gains, with prices trading above $1800.

With markets reining in bets on the Fed tightening policy, gold has the potential to shine ahead of the US jobs report on Friday.

As regards the technical picture, a solid daily close above $1792 may open the doors towards $1813 and $1834. Sustained weakness below $1792 could encourage a decline towards $1770.

 

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