Beyond an Omicron inspired sell-off, markets experienced a taper tantrum: Strategist
U.S. equities rebounded from Friday’s selloff as investors took comfort in reports that cases of the omicron variant have been relatively mild.
The S&P 500 rose 1.2 per cent, erasing last week’s losses, while the technology-heavy Nasdaq 100 gained 0.9 per cent.
The mood across markets was calmer on Monday as investors pointed to good news from South Africa that showed hospitals haven’t been overwhelmed by the latest wave of COVID cases. However, the Cboe volatility index remained elevated.
“Although we do expect this volatility to continue, it very well could be a buying opportunity,” said Ryan Detrick, chief market strategist at LPL Financial, in a note. “We’ve been living with COVID-19 for more than 20 months now. We’ve seen several variants and managed to move forward, and we expect a similar playbook to work once again.”
Oil rose after Saudi Arabia boosted crude prices, signaling confidence in the demand outlook. U.S. natural gas fell on forecasts for warmer weather, easing some previous inflationary pressures. And the 10-year Treasury yield advanced to 1.43 per cent.
Initial data from South Africa are “a bit encouraging regarding the severity,” Anthony Fauci, U.S. President Joe Biden’s chief medical adviser, said on Sunday. Though, at the same time, he cautioned that it’s too early to be definitive.
“Admittedly, we don’t know how effective current vaccines are against omicron, or how transmissible it is, but we do know that the appetite for another nationwide shutdown is quite low and that these questions should be answered over the coming weeks,” Detrick said.
The VIX, or so-called fear gauge, fell roughly three points to 27 on Monday after it failed to initially match a high corresponding to when the S&P 500 dropped below its Sept. 20 low last week.
“That marked the beginning of what turned out to be the strongest October rally since 2015,” said Chris Larkin, managing director of trading at E*Trade Financial. “While past is rarely prologue, it should give seasoned traders out there something to think about ... This suggests reduced volatility concerns even though the market had fallen to fresh lows.”
The Stoxx Europe 600 index gained 1.3 per cent while shares in Japan, China and Hong Kong fell on tech weakness. Evergrande’s dollar bonds declined sharply and shares plunged 20 per cent to a record low after the firm moved closer to a debt restructuring. China also cut the amount of cash most banks must hold in reserve, acting to counter the economic slowdown in a move that puts its central bank on a different policy path than many of its peers.
Later this week, attention will turn to U.S. consumer price index, which is expected to show the largest annual advance in decades, giving the Federal Reserve more leeway to deliver swifter policy tightening in its more hawkish tilt.
“That’s a set up where stocks can continue to rally, although I think we all need to expect a more ‘normal’ 2022 from a return standpoint,” wrote Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter. “Once the market accepts this new Fed paradigm, the reality will set in that the Fed is still very accommodative. QE is still ongoing and even if there are two rate increases in 2022, that still puts the Fed funds rate well below 1 per cent at year-end.”
Some of the main moves in markets:
- The S&P 500 rose 1.2 per cent as of 4 p.m. New York time
- The Nasdaq 100 rose 0.9 per cent
- The Dow Jones Industrial Average rose 1.9 per cent
- The MSCI World index rose 0.8 per cent
- The Bloomberg Dollar Spot Index was little changed
- The euro fell 0.3 per cent to US$1.1283
- The British pound rose 0.2 per cent to US$1.3257
- The Japanese yen fell 0.6 per cent to 113.48 per dollar
- The yield on 10-year Treasuries advanced eight basis points to 1.43 per cent
- Germany’s 10-year yield was little changed at -0.39 per cent
- Britain’s 10-year yield declined one basis point to 0.74 per cent
- West Texas Intermediate crude rose 5.3 per cent to US$69.80 a barrel
- Gold futures fell 0.2 per cent to US$1,780 an ounce