Markets, policymakers, and central bankers are all focused on emerging data around the new Omicron COVID-19 strain. Though global markets tumbled between 2%-3% on Friday, the MSCI ACWI remains just 3% below recent all-time highs, supported by strong earnings trends and surging Q4 U.S. growth. At this juncture, there is scant data to adequately classify Omicron as either a severe risk or a false alarm. The three primary lenses under which all market participants and policymakers will evaluate Omicron in the coming days/weeks are its transmissibility, severity, and vaccine responsiveness.
- The U.S. equity market reacted emotionally on Friday, which is unsurprising given its 9% rally since early October. In the near term, we expect the selloff to be contained with the S&P 500 finding initial support at the 4500-4550 levels. However, if the Omicron variant proves more virulent or widespread than currently anticipated, Friday offered a preview of how markets could respond to disappointing news.
- Countries are enacting various forms of travel restrictions from South Africa out of an abundance of caution, where Omicron appears to have originated. If evidence dictates broader shutdowns, then previous expectations for a rebound in Q4 GDP could be delayed into Q1 2022.
- The next Fed meeting in mid-December will integrate new virus data into discussions around their pace of tapering, despite recent inflation data and last week’s minutes.
For now, the weight of the evidence in our work continues to favor equities over bonds and U.S. over international markets.
A look back
- Global equities fell -2.8% for the week, led lower by international markets. News of the Omicron variant caused volatility to see the biggest 1-day jump since January.
- 10-year U.S. Treasury yields fell 15 basis points on Friday. Market participants fled to safety during Friday’s volatile session as high yield spreads widened 30 basis points.
- Emerging news of the Omicron variant offered more questions than answers as world leaders continue to grapple with an appropriate response.
A look ahead
- The Omicron variant will command elevated attention as details emerge regarding its transmissibility, vaccine response, and severity versus previous COVID-19 strains.
- Federal Reserve (Fed) officials hit the speaking circuit this week, highlighted by Chair Powell and Treasury Secretary Yellen addressing policymakers.
- Economic releases: Markit & ISM Manufacturing and Services, Fed Beige Book, Durable Goods Orders, Conference Board Consumer Confidence, and Nonfarm Payrolls.
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