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Tuesday, August 9, 2022

US stock futures rebound from another Omicron sell-off despite Jerome Powell hawkishness

Investors have to brace for more market volatility thanks to the new Omicron variant.

  • US futures rallied Wednesday, and European stocks rebounded from the latest Omicron sell-off.
  • Investors were digesting Fed Chair Jerome Powell’s comments on inflation no longer being transitory and an earlier end to tapering.
  • The S&P 500 closed Tuesday 2.9% below its record level, which was reached in November.

US stock futures rallied Wednesday as global stocks rebounded from the latest Omicron-driven sell-off, as investors weighed Federal Reserve Chair Jerome Powell’s hawkish comments on bond-buying and inflation.

S&P 500 futures were 1.19% higher, Dow Jones futures were up 0.89%, and futures for the tech-heavy Nasdaq 100 were 1.36% higher, suggesting a higher open for markets at the start of a new month.

Uncertainty around the severity and impact of the newly detected Omicron coronavirus variant has caused volatility in stocks after months of calm and regular record highs.

“The only winner in December [is] likely to be volatility, as the street sells everything on any negative Omicron headline, and then buys everything back on any hint that the new variant isn’t as serious as we all thought,” Jeffrey Halley, senior market analyst at Oanda, said in a daily note.

Stocks began tumbling Tuesday after Moderna CEO Stephane Bancel told the Financial Times that vaccines were likely to be much less effective against the variant.

The S&P 500 fell 1.9% Tuesday as hawkish comments from Powell also drove selling. It put the benchmark US stock index 2.9% below its record closing high of 4,704.54, reached on November 18.

But comments from the Israeli health minister on Omicron appeared to be contributing to a more positive tone Wednesday. Nitzan Horowitz said “there are initial indications that those who are vaccinated with a vaccine still valid or with a booster will also be protected from this variant,” according to CNN.

That followed scientists at the University of Oxford saying Tuesday “there is no evidence so far” that Omicron is resistant to current vaccines.

European stocks rebounded along with US futures, after falling sharply Tuesday, with the continent-wide Stoxx 600 up 1.09%. Hong Kong’s Hang Seng rose 0.78% overnight, while Tokyo’s Nikkei 225 gained 0.41%.

Bond yields, which move inversely to prices, rose as investors moved away from safe-haven assets in favour of equities.

The yield on the key 10-year US Treasury note climbed 5.4 basis points to 1.495%. It remained well below the recent one-month high of 1.666% touched on November 24, however, in a sign that investors want to own safer assets in the face of rising coronavirus risks.

Short-term bond yields jumped Tuesday and pushed higher Wednesday after the Fed’s Powell told lawmakers that it’s “probably a good time to retire” the word “transitory” to describe inflation and considered an earlier-than-expected end to tapering asset purchases.

Markets interpreted Powell’s comments as hawkish — that is, as a sign that the Fed is set to become more aggressive in tackling inflation by raising interest rates and cutting back on bond buying.

The 2-year Treasury note yield rose 6.5 basis points to 1.495% Wednesday, from as low as 0.429% the previous day. It is seen as the security most sensitive to interest rates.

“Powell just added gasoline to the fire by finally admitting that inflation isn’t going away as fast as anyone would like,” said Ryan Detrick, chief market strategist for LPL Financial.

“A faster tapering [of bond purchases] is probably coming as a result, and that has markets worried the punch bowl is leaving the party.”

Oil prices have also been whipsawed by the Omicron variant, and rallied along with stocks Wednesday. Brent crude was up 4.56% to $72.39 a barrel, while WTI crude was 4.29% higher at $69.00 a barrel.


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