News & Analysis

Omicron and inflation fears driving global markets

6 December 2021 By Lachlan Meakin

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Market sentiment soured last week with global equity markets mostly finishing lower in a volatile week.

The risk off market narrative also saw FX traders flock to the US dollar which soared against the commodity and risk sensitive AUD and NZD in particular and saw other safe haven currencies, the JPY and CHF outperform.

Risk aversion also resulted in the VIX, or “fear” index closing at its highest price since February, Growth linked Crude oil soften and safe haven Gold hold its ground in spite of a resurgent US dollar.

Mostly driving this sentiment was a combination fears around the emerging Omicron Covid-19 variant, with it’s potential to derail the global economic recovery, and an increasingly hawkish Federal Reserve.

During the week Federal Reserve Chair Jerome Powell officially retired the “transitory” description for the stickier than expected inflation the US is seeing, this change in language saw markets repricing a faster than previously expected tightening cycle from the Fed, causing the volatility in equity markets and a surging US dollar.

This volatility could continue this week until there is a consensus on the danger (or lack thereof) Omicron poses. Friday will also see the US November CPI figures released,

Headline inflation is expected at a whopping 6.8% y/y in November. That would be the highest reading in almost 40 years. An upside surprise could increase hawkish Fed policy bets for 2022, seeing continued equity volatility and USD strength.

 

Forex markets – The weeks economic announcements

There is a busy week ahead in the economic calendar, central banks in Australia and Canada releasing their rate statements and US CPI figures are the highlights.

 

Tuesday

RBA rate statement – Australia’s central bank is likely to highlight the interval between building economic momentum and faster price gains as well as the yet unknown risks from the Omicron variant in its final meeting of the year. On this, the RBA is expected to maintain a cautious stance despite recent data showing increasing strength in the  economy. Last week’s GDP report showed the effect from NSW and Victorian lockdowns wasn’t as bad as feared.

While rates remaining on hold is a certainty, traders will be looking at tomorrow’s statement for clues on the RBA’s review of its bond-buying program on Feb. 1, the first meeting of 2022.

**Please tune in to www.ausbiz.tv 2:40PM AEDST on Tuesday, where I will be discussing the RBA decision with the panel**

 

Wednesday

Bank of Canada rate statement

The Bank of Canada is expected to keep the spotlight on inflation at a policy decision next week, as investors anticipate the start of an aggressive campaign of interest-rate hikes next year. Officials aren’t anticipated to make any changes to policy on Wednesday.

The Canadian central bank has already ended its bond-buying stimulus program and recent data showing strong growth in economic activity and employment have seen markets already pricing in five hikes over the next 12 months.

 

Friday

US CPI figures.

Friday sees the release of the US November CPI figures which as previously outlined are expected to see a large increase, 6.7% from 6.2% in October, if this comes about it would be the fastest increase since 1982.

Although the Federal Reserve has typically looked to PCE index as its preferred gauge of inflation, the CPI has served as another critical datapoint underscoring the extent of price increases impacting consumers.

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