US equities recover some of Friday's losses; US 10-year rate pushes higher. But an unconvincing bounce-back as investors adopt a cautious tone until we get more clarity on Omicron. Germany CPI inflation hits 6% but no support for EUR

Some of Friday’s “risk-off” price action has reversed, as investors show less fear about the new COVID19 variant Omicron. The S&P500 is currently up 1.6% while the US 10-year rate is up 6bps. The USD has been well supported, seeing the NZD continue to struggle, going sub-0.68 to a fresh low for the year, underperforming other commodity currencies, with the AUD relatively flat.

The fear that enveloped markets late last week on reports of a new mutant strain of COVID19 spreading across the world has subsided a little. But Omicron will remain in the spotlight for several weeks, as investors take bets on how much damage it will do to the world economy. Market volatility will remain higher than usual until we get more clarity on this strain of the virus.

The WHO said that it is too early to say how transmissive and severe the new strain is, even as the South African doctor at the centre of the outbreak suggests that patients she has treated – admittedly a younger cohort –  have only shown mild symptoms. Indeed, that seems to be the opinion of the experts, that the overall number of patients so far remains too small and their infections too recent to draw firm conclusions about Omicron, and more clarity will take weeks rather than days.

There has been an unconvincing recovery in European and US equity markets. The Euro Stoxx 600 index recovered 0.7%, after Friday’s 3.7% pummelling while the S&P500 is currently up 1.6%, after falling 2.3% on Friday. The Russell 2000 index of small US cap stocks and the Solactive Airlines, Hotels and Cruise Line Index are currently up  “only” 0.7%, after their meaty falls on Friday – investors are clearly still taking a fairly cautious and selective approach to dipping back into risk assets.

The shift out of the safe-haven of US Treasuries has also been moderate, with the 10-year rate currently up 6bps for the day to 1.53% (earlier hitting a high of 1.56%), after Friday’s 16bps plunge. Fed Fund futures are relatively flat overnight, so the cloud of uncertainty overhanging Omicron’s impact on the economy remains a key consideration in expectations of how aggressive the Fed might be next year in removing policy stimulus.

Continuing the recent trend of US economic data beating expectations, pending home sales shot up 7.5% in October to a 10-month high, with the National Association of Realtor’s Chief Economist saying that existing home sales are on track to exceed 6 million this year, which would be the strongest in 15 years.

Continuing the trend of positive global inflation surprises, Germany’s CPI surged 6.0% y/y in November, well above the 5.5% expected, taking inflation to about a three-decade high, as seen in the US and in many other places. Annual inflation for Spain and Belgium both came in at 5.6% y/y and the euro area figure is due tonight, with a market expectation of 4.5% y/y. ECB members Lagarde, Schnabel, de Cos, and Villeroy de Galhau were all on the wires, providing a similar message – that the surge in inflation was driven by unusual temporary factors, the November figure would prove to be the peak, and with inflation is expected to gradually fall back to 2% next year monetary policy could be patient.

The European Commission’s surveyed economic confidence index for the euro area slipped to 117.5 in November, as expected, not helped by the Delta wave and fresh lockdowns in the region.

Oil prices are up in the order of 3-4% after their 12-13% fall on Friday. Brent crude is trading around USD75 while WTI crude is at USD71.

The rise in oil prices has supported CAD and the AUD, while the NZD has been left behind these commodity currencies. For the AUD, the August low of 0.7106 has held, with the currency getting down to 0.7114 overnight and currently flat since Friday’s at 0.7130.

For the NZD, the prior low for the year of 0.6805 printed in August and repeated on Friday night broke, with the currency trading down 0.6788 and it currently sits near 0.68.  In our early-October NZD downgrade, we alluded to the 0.67 level as being potentially the bottom of the range.  Our projections did not incorporate a more vicious COVID19 strain, so if Omicron turns out to be deadlier and more vaccine-resistant, then that argues for a weaker global growth backdrop and additional NZD downside potential, possibly bringing 0.65 into the picture. That extra downside could be avoided if the fear of Omicron quickly passes following more information on the strain.  In the meantime, the 0.68 level might continue to be seen as key technical support.

Stronger Germany inflation figures didn’t provide any support to the euro and it continues to languish. Alongside the NZD the EUR has been one of the weakest majors for the day, down 0.4% to 1.1270. The most lift in risk appetite has also seen JPY lose some gloss, with USD/JPY up 0.3% to 113.75.

Domestic rates fell on the open, reacting to Friday night’s large moves for Treasuries, but the move was pared back as Treasury yields rose during Asian trading.  Rates were little changed on the day, with the 10-year NZGB down 1bp to 2.44% and 10-year swap unchanged at 2.73%. The 2-year swap rate fell to 2.10% early on, before rising to close the day unchanged at 2.15%.

The economic calendar in the day ahead is heavy.  Locally, the final reading of the ANZ business outlook survey will remain contaminated by Auckland’s lockdown, so will be of only passing interest. The key global releases include China PMI, euro area CPI, Canada GDP and US consumer confidence data. Fed Chair Powell’s comments in front of a Senate Panel will be closely scrutinised as he gets grilled on the surge in inflation and what he might do about it.