Equities turned south during the US session after the US detected its first Omicron case. This suggests that market participants keep coronavirus on the front page of their agendas and are likely to continue reacting to related headlines. Today, OPEC and its allies meet to discuss output, but we don't expect any change to the existing policy.
Wall Street Slides After First Detection of Omicron Variant in the US
The US dollar traded higher against all but two of the other major currencies on Wednesday and during the Asian session Thursday. It underperformed only against JPY, while it was found virtually unchanged against CHF. The greenback gained the most versus AUD, NZD, and CAD.
The strengthening of the US dollar and the Japanese yen, combined with the weakening of the risk-linked Aussie, Kiwi and Loonie, suggests that market sentiment turned back to risk-off at some point yesterday or today in Asia.
Indeed, although EU indices continued the recovery started during the Asian trading yesterday, Wall Street saw all three of its leading indices closing in the red, with sentiment turning more mixed today in Asia.
The deterioration in the broader sentiment during the US session confirms our choice not to trust the prior recovery. Remember that we couldn't see any fundamental catalyst behind the rebound, and that's why we classed it as a corrective move.
It seems that investors' primary concern remains the uncertainty surrounding the Omicron coronavirus variant and the implications any new restrictions could have on the global economy. Indeed, Wall Street came under selling interest as soon as we had the first detection of the new variant in the US.
Some say that its symptoms are mild and that current vaccines are still effective against it, while others express concerns over its effectiveness and its transmissibility. Despite some being more optimistic, or better say less pessimistic, than others, the uncertainty by itself may be enough to prompt market participants to reduce further their risk exposure.
Another reason for doing so may be the hawkish remarks by Fed Chair Jerome Powell before Congress. Yesterday, the Fed Chief testified before the House Financial Committee. It repeated the view expressed before the Senate Banking Committee on Tuesday. The surge in inflation may not be transitory after all, and that they may need to accelerate the tapering process.
As for our view, we stick to our guns that the coronavirus will stay on the front page of investors' agenda. The World Health Organization said it expected to have more information on the Omicron variant within days, but up until we get an official and justified answer, market participants are likely to stay reluctant to add risk to their portfolios massively.
Therefore, we see the case for equities and other risk-linked assets to continue drifting south while safe-havens are likely to stay supported.
S&P 500 – Technical Outlook
The S&P 500 cash index traded lower yesterday after it hit resistance at 4655. The slide resulted in a dip below Tuesday's low of 4560 and a test at 4500. Given that the index remains below the last upside support line taken from the low of Oct. 6 and below the downside one drawn from the high of Nov. 22, we will consider the short-term outlook to be negative.
Even if we see another round of short-covering, we expect it to stay short-lived. We believe that we are likely to experience further declines, with a break below 4500 paving the way towards the low of Oct. 18, at 4445, or the inside swing high of Oct. 7, at 4430. If neither zone can stop the declines, we may experience extensions towards the inside swing high of Oct. 12, at 4375.
The outlook could turn positive upon a break above the index's record of 4744. With no prior highs or inside swing lows to mark potential resistances, we would mark the round figures of 4800 and 4900.
NZD/USD – Technical Outlook
NZD/USD traded lower yesterday after hitting resistance at 0.6868, but the slide was stopped near the 0.6805 barrier. Overall, the pair remains below the downside resistance line taken from the high of Nov. 9, and thus, we will continue to consider the short-term outlook to be negative.
A break below 0.6805 could initially aim for the 0.6772 barrier, marked by the low of Nov. 30, the break of which would confirm a forthcoming lower low and perhaps challenge the 0.6740 barrier, characterized by the inside swing high of Nov. 4. Another dip below 0.6740 could carry more significant bearish implications, maybe seeing scope for declines towards the next day's low, at 0.6680.
We will start examining a bullish reversal upon a break above 0.6915. The rate will already be above the aforementioned downtrend line and may climb towards the 0.6955 level, marked by the high of Nov. 23. A break higher could allow advances towards the 0.6982 or 0.7013 barriers, marked by the low and high of Nov. 22, respectively.
Elsewhere
After meeting on Wednesday on its own, OPEC will sit down with its non-OPEC allies to discuss oil production. Despite the failed attempt by the US and other governments to release oil from strategic reserves in a bid to lower gasoline prices, both WTI and Brent collapsed on Friday due to concerns that the new COVID variant will have a severe impact on demand.
Therefore, with that in mind, we don't expect the cartel to proceed with any bold decisions at this gathering. We hope producers stick to monthly output increases of 400,000 BPD. That said, it would be interesting to see their updated forecasts.
Will they reflect concerns over diminishing demand? If indeed this is the case, another round of oil selling could be possible, despite members refraining from increasing production instantly.
As for the speakers, we will get to hear from several Fed members, including Fed Board Governor Randal Quarles, Atlanta Fed President Raphael Bostic, Richmond Fed President Thomas Barkin, and San Francisco Fed President Mary Daly. It will be interesting to see whether these officials agree with Powell's opinion or not.