Markets weigh omicron threat
Summary
Two key events spurred markets this week — Chair Powell’s renomination to the Fed on Tuesday and the spread of the omicron variant of COVID-19. While market sentiment rose to start the week following the renomination, fears that the omicron variant could diminish global growth dampened markets to close out the week.
Economic outlook
President Biden announced he will nominate Jerome Powell for a second term as Federal Reserve Chair after months of speculation and a long deliberation process within the White House. Chair Powell received bipartisan praise for his leadership following the onset of the pandemic after originally tapped to lead the central bank under the Trump Administration in 2016. President Biden also announced that Lael Brainard would be elevated to Vice Chair. Some progressive groups had pushed for Brainard for Fed Chair, criticizing Powell for a lack of action on climate change, ethics issues under his tenure, and loosening some regulations on financial institutions. Interest rates climbed following the announcement since Chair Powell is seen as slightly more hawkish.
The bullish sentiment was quickly undone Friday, as fears of the omicron variant gripped the market. While much is still unknown, some earlier indicators of the Omicron variant fueled concerns that it could be more transmissible. The virus was first identified by South African doctors but there have now been confirmed cases in Europe and Asia, with some nations renewing travel restrictions. News of the variant was a drag across all financial markets as investors sought a more risk-off posture.
Dollar strengthens to highest level since July 2020 before retreating slightly
The U.S. dollar has continued its strong performance for the year. The dollar climbed to the highest levels since July 2020 following the Chair Powell renomination. The rise was also attributed to dimming growth prospects in much of the world. In Europe, Germany reintroduced some COVID-19 restrictions after a surge in cases, while in the UK supply chain issues have been made worse through Brexit withdrawal. Asia has also seen sluggish growth so far in the second half of 2020. The dollar did give up some ground on Friday following the spread of the omicron virus. The spread of this variant — and how central banks respond — will guide the strength of the dollar heading into next year.
(Related insight: Read "Six key steps to implementing an operational FX program")
Crude oil falls as omicron limits projected demand
The price of crude oil has been a key point of tension between the Biden Administration and OPEC+, with the oil cartel rebuffing multiple public calls to increase supplies. President Biden sought to soften the rise in prices at the pump by tapping into the U.S. strategic reserves of petroleum, in coordination with China also dipping into their supplies. The market moved slightly lower earlier in the week on the news, but it wasn’t until the omicron variant spread where the crude oil market pulled back meaningfully. The dip in supply caused the price of oil to fall more than 11%, with the WTI benchmark dipping below $70/bbl. WTI ended the week at $69.38/bbl and the market continues to react to omicron variant concerns.
Looking ahead
This week will be full of Fed speeches as Chair Powell is scheduled to deliver remarks on Tuesday, followed by many of his colleagues over the course of the week. Manufacturing and consumer sentiment are also due to be delivered this week. The market will also closely follow any new information on the omicron variant.
(Related insight: Register for the December webinar, "Treasury 2022: Opportunities, Priorities, and Trends")
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About the author
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James Mallon
Analyst
Corporates | Kennett Square, PA
James is an analyst on Chatham’s Corporates Sector, specializing in foreign currency, interest rate, and commodity hedging analytics and strategy.
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