SW Weekly Market Update 1 1

Weekly market update 28th November – Risk aversion buoyed demand for safe-haven currencies as the Omicron variant battered global markets

Weekly market update 28th November – Risk aversion buoyed demand for safe-haven currencies as the Omicron variant battered global markets

1. Dollar, Japanese Yen and Swiss Franc rallied, as traders sought shelter in safe-haven currencies following the discovery of a new coronavirus variant named Omicron. The World Health Organisation (WHO) said Omicron may be more contagious and preliminary evidence suggested there is an increased risk of reinfection. The emergence of Omicron sapped risk appetite and sparked market sell-off as it could derail economic recoveries. On the data front, US Flash services PMI fell to 57.0 in November, down from 58.7 in October. Despite that, US private sector firms signalled a sharp upturn in business activity during November, as the rate of expansion remained historically elevated. US manufacturing PMI stood at 59.1, slightly shy of 59.3 estimates but ahead of October’s 58.4 reading, as manufacturers posted a slightly stronger increase in production. Despite that, capacity remained under pressure caused by labour and material shortages. For the coming week, investors will turn their attention to the ISM manufacturing, ISM services PMI data and the US jobs report, which will probably point to a continued economic recovery. Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen will also testify on the CARES Act before the Senate Banking Committee on Tuesday and Wednesday.

2. Across the Atlantic, European stocks plunged to six-week lows on Friday, with Frankfurt’s DAX closing 4.2% lower and the pan-European Stoxx 600 finishing 3.7% lower in its worst session since June 2020, amid concerns of the new variant. The Euro pared recent losses towards the end of the month but hovered near its weakest level since July 2020, with the monetary policy outlook divergence seen between the ECB and Fed. The minutes of the ECB and Fed policy meetings showed officials in Europe reiterated that the uptick in inflation was seen as temporary while the US Federal Reserve signalled it was ready to raise interest rates if inflation continued to run high. On the data front, faster eurozone economic upturn, represented by a slew of flash manufacturing and services PMI data surpassing estimates was marred by record inflationary pressures, supply bottlenecks and the pandemic worries. The German IFO German business sentiment worsened again in November, the fifth consecutive decline after it peaked in June. For the coming week, traders will turn their attention to November’s consumer price report published for the Eurozone, for further insights on the ECB’s guidance ahead. Annual inflation rate could reach 4.4%, the highest since 1991, amid an uncertain economic outlook following new restrictions imposed across the region.

3. Sterling pared recent gains to reach its weakest level since December 2020, as traders cast doubts on previous anticipation for the Bank of England’s interest rate hike in December’s meeting. On the data front, the UK Flash Manufacturing PMI stood at 58.2 in November, up from 57.8 in October, an indication that the UK manufacturing recovery gained momentum in November although the supply chain crisis showed little sign of easing, escalating input price inflation. UK Flash Services PMI posted 58.6 in November, down from 59.1 in October and pointed to a slight loss of momentum for the service sector although growth was stronger than the third quarter of 2021. Looking ahead, investors will keep a close watch on final Markit PMI data, alongside Bank of England’s monetary indicators and Nationwide Housing prices.

4. Commodity currencies nosedived as risk aversion flooded markets with the discovery of the Omicron variant. The Reserve Bank of New Zealand (RBNZ) lifted interest rates by 25 basis points to 0.75 and indicated that it was appropriate to continue reducing monetary stimulus to maintain price stability and support maximum sustainable employment, as rising inflationary pressures and easing of coronavirus restrictions supported economic activity. Gold dipped to below $1,800 an ounce on Friday, an almost 3% weekly loss on the back of a stronger Dollar and easing inflation expectations which dampened the bullion’s appeal. Crude oil prices declined 11% as risk sentiment dampened. Looking ahead, OPEC alliance will meet on December 1-2 to decide on whether to raise output by 400,000 bdp in January, while Canada’s GDP and unemployment rate data will be closely watched for clues on the BoC’s guidance ahead.

Salzworth Asset Management