Developments around the Omicron coronavirus variant will continue to be the main driver of market sentiment in the week ahead and this news flow, together with a hawkish turn by the Federal Reserve, means Friday’s inflation data will be in the spotlight. Broad-based market volatility, which saw Bitcoin tumble on Saturday, looks set to remain elevated. Meanwhile, the UK is to release October GDP data ahead of the Bank of England’s December meeting. Here’s what you need to know to start your week.
Omicron uncertainty
The number of countries reporting Omicron cases is continuing to rise, but scientists still do not know whether it is more infectious than other variants, what is the severity of the disease or what level of protection is provided by existing COVID-19 vaccines. It will likely take several more weeks to get these answers.
The Omicron variant appears to be spreading faster than Delta, which accounts for 99% of current transmissions.
The emergence of the new strain has pummeled financial markets and undermined the global economic recovery just as countries were beginning to emerge from the lockdowns triggered by Delta.
The International Monetary Fund warned Friday that it is likely to lower its global economic growth estimates due to the new variant.
Inflation data
The highlight of the economic calendar will be Friday’s November consumer price inflation data. U.S. CPI accelerated 6.2% in October, the fastest annual increase in over thirty years amid a global supply chain crunch and is forecast to rise 6.7% in November.
Another strong reading could underline expectations for faster tapering by the Federal Reserve.
Last week Fed Chairman Jerome Powell said the central bank will likely discuss a faster wind-down of its stimulus program in its meeting later this month, adding to speculation that interest rate hikes would also be brought forward.
Powell also said the word “transitory” was no longer the right word to describe surging inflation.
Friday’s employment report, showing the smallest growth in job creation so far in 2021 did little to alter expectations for faster tapering. While the economy added just 210,000 jobs in November, the unemployment rate dropped to 4.2%, its lowest since February 2020, and wages increased.
Volatility set to continue
Stocks sold off last week, hit by the double-whammy of uncertainty over the Omicron variant and the prospect of faster tapering by the Fed.
That turbulence looks set to continue, with investors dumping shares of growth and technology companies in favour of value stocks, which include companies like banks, financials, and energy firms, expecting them to perform better as the Fed normalizes monetary policy.
Value stocks rallied earlier in the year as the U.S. economy reopened but faltered later as investors rotated back to tech shares.
“The Fed brings the punch bowl and they are the ones that remove the punch bowl,” Michael Antonelli, strategist at Baird told Reuters. “Markets are quickly repricing their view of the future.”
Crypto selloff
Bitcoin, the largest cryptocurrency by market value, fell as much as 20% on Saturday, amid a broad-based selloff in digital currencies, in the wake of a volatile week on equities markets.
Ether, the second-largest cryptocurrency, dropped more than 10% before pulling back, while other widely traded digital coins including Dogecoin and Shiba also tumbled.
Concerns over a regulatory crackdown may be clouding the outlook for crypto investors.
On Wednesday, executives from major cryptocurrency firms, including Coinbase (NASDAQ:COIN), are due to testify before the U.S. House Financial Services Committee, amid calls for regulation of the notoriously volatile market sector.
Prospects for faster rate hikes could also be weighing on the outlook for cryptos, as higher rates make holding speculative assets less attractive. When the Fed last hiked rates in 2017 and 2018, bitcoin prices fell considerably.
UK GDP
The UK is set to release October GDP data on Friday which is expected to remain steady as workers gradually returned to offices and retail sales remained solid. Recent economic data out of the UK has indicated that the Bank of England could go ahead with its much-debated first rate hike since the pandemic in the face of spiralling inflation.
But with the fresh uncertainty resulting from the Omicron variant policymakers may decide in their December meeting to wait until early 2022 before hiking rates. November’s surprise decision to keep rates on hold showed that policymakers are comfortable with waiting for new data.
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