European stocks lower after Wall Street falls on first omicron case in the US

News flow sensitive: It was a strong day for European equity markets on Wednesday – the FTSE 100 rose almost 1.6% for its best day in four months, while the DAX rallied 2.5%, its strongest session in eight months. Bourses across the continent rallied firmly as markets paid back much of the faster-taper/stickier-inflation narrative from Tuesday: getting a grip on inflation is no bad thing. Also, the market seemed to be buying more into the idea that we shouldn’t panic over omicron.  

 

Or is it? European markets declined ~1% in early trade Thursday, taking their cue from a soft session on Wall Street. US markets tried to bounce, rising firmly at the open, but ended sharply lower as California confirmed the first omicron case in the US. Panic? Not quite but certainly concern and uncertainty produced a pretty wild session of swings. The S&P 500 traded through its 50-day moving average where there is supposed to be lots of support around 4,530, closing at 4,513, having traded as high as 4,652. Quite how the market would move so swiftly when it’s a certainty that omicron is everywhere is unclear, but shows the acute sensitivity equity markets have to the Covid news flow – more like 2020 than 2021 in some ways.  

 

Or is it? Australia’s health chief is the latest to say there is no evidence omicron is any deadlier. “Of the over 300 cases that have now been diagnosed in many countries, they have all been very mild or in fact had no symptoms at all,” the chief medical officer, Paul Kelly, said. Hardly a reason to panic – but markets are responding not to the virus itself but the response of governments and of change in people’s behaviour. Monetary policy is heading in the opposite direction to accommodate, ammo well and truly spent, and the fiscal response is not as straightforward as it was in 2020. Just as well it’s not going to have the same economic impact as before…fingers crossed. GSK shares inched up as it said its Covid antibody treatment is still effective against the new variant. Meanwhile, against all this, we have talk of Russian troop build-ups near its Ukraine border and Nato suggesting we should prepare for the worst. 

 

We had more from Jay Powell in his second day of testimony on capitol hill. There was lots more about speeding the pace of tapering, on inflation, about the retirement of the phrase ‘transitory’ and what they meant by that term the first place. But the best for me was: ‘We are not at all sure of inflation forecast’. No, really? You’ve nailed it thus far…I have every confidence.  

 

Before the CDC confirmed the omicron case the market liked a cooling in inflation component of the latest ISM Manufacturing PMI, which overall still showed strong expansion. The prices paid index declined to 82.4 versus 85.7 in October. New orders and employment both rose. A business roundtable index showed overall confidence at a 20-year high – though naturally this was just before the omicron variant emerged to unsettle markets. 

 

As an aside, lots of rotation has been a hallmark of 2021 – most stocks have had a drawdown of 10% or more at some point this year. Just the indices haven’t reflected this because there has been so much internalisation of the buying and selling and this incremental grind higher for various reasons: FOMO, TINA, whatever you call it. Pullbacks or even shakeouts can be useful for the market not only to allow new entrants but also to reset expectations. We’ve now had 2/3 good shakeouts – trapped supply above will prove resistance, but this might be a useful reset ahead of Christmas. 

 

In short the market remains acutely sensitive to anything about omicron and will respond on pos/neg headlines with abandon, which makes positioning difficult – a market that will cut both bulls and bears. Sector wise, healthcare and consumer defensives won out yesterday, quality tech provided some resistance with Apple and Microsoft barely declining. Momentum was a problem with ARKK down almost 7%, almost 40% below the all-time high struck earlier this year. This is mirrored today on the FTSE with the likes of Unilever and United Utilities among the few risers. Shell and BP also higher as crude rallied 1% though oil remains under a heap of pressure with OPEC+ set to meet today to decide on whether to increase output by 400k bpd in January. A pause in the loosening of output controls would help sentiment in the market and is increasingly expected.  

 

WTI (Jan) found new resistance at the new 23.6% retracement area, not indicative of much bid coming in yet. Speculative positioning will remain weak until this clears out.

Oil Chart 02.12.2021