Stocks Extend Relief Rally As Omicron Fears Ease

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  • US futures and Asian equities are climbing as the dollar falls.
  • Investors may be too calm about risks of a new variant.
  • Constant US inflationary pressures could accelerate the Fed’s decline, rate hikes.

Risky assets are easing due to easing fears surrounding the Omicron variant, with stock markets extending this week’s relief rally. Asian indices are mostly in the green while U.S. futures show another day of gains, with the S&P 500 just 0.38% off its record high. The US dollar benchmark is down slightly as the VIX index returns closer to 20, the average reading for this year.

Omicron risks could pull a carpet from under an emergency rally

Of course, these are still early days and attempts to restore global equities to record highs could be on shaky ground. Recent gains are not yet fully assured, as markets risk being overly complacent due to the downside risks stemming from the latter variant, without yet knowing the true extent of Omicron’s potential impact on the global economy.

After all, Covid cases are still growing in major economies from Germany to South Korea. Also, an initial study from South Africa showed that those vaccinated with the Pfizer doses show a 40-fold drop in produced antibodies against the Omicron variant.

While investors may be encouraged by the fact that this is not the first attempt by the world to curb the spread of Covid-19, more abrupt sales of risky assets cannot be ruled out, especially if continued vaccination efforts and other virus-suppressive measures are lacking. against. Omicron or future variants. Even when optimism abounds today, some caution remains warranted.

Inflation and Fed policy remain major issues in the 2022 outlook

In addition to ongoing pandemic developments, global investors still have several risks to counter in the new year, including rising inflation, which could lead to a more aggressive political tightening of major central banks. Such concerns will be framed this Friday by the U.S. consumer price index.

Stubbornly raised pressure would justify Fed Chairman Jerome Powell’s hawk pivot last week and could pave the way for an accelerated Fed downturn, a decision that could come at next week’s FOMC meeting. In the event that markets raise their expectations for US tariffs in 2022, this could spell out even more gains for the green dollar, possibly to the chagrin of commodities and the rest of the FX complex.

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