The 60 second overview
Risk sentiment: Markets are heading into Christmas in a positive spirit after studies give encouraging signals that omicron might be less dangerous than the delta variant. A more infectious but a less dangerous variant has the potential to eventually bring the pandemic to an end as herd immunity could be reached more broadly without overwhelming hospital systems. From an economy's viewpoint, a scenario like this would imply less need for severe restrictions and more normal economic activity leading to an eventual easing in supply-side bottlenecks as well as a normalisation in consumption patterns.
Omicron: A handful of studies regarding omicron now indicate that the variant could be less likely to cause a severe disease than its predecessor delta variant. Bloomberg refers to two studies from UK that indicate a significantly lower risk of hospitalisation from omicron. FT adds studies from Denmark and South Africa with similar findings. Despite early optimism, researchers continue to highlight that the
results are indicative and while the variant could be less dangerous on an individual level it could still lead to overwhelming of hospital capacities if the overall caseloads rise to unprecedented levels. Also, several factors could skew the results: 1) not all studies control for earlier infection or vaccination status, which reduce the risk of a severe disease 2), sample demographics may not be generalised to all populations. For example, the South African population is younger than European populations and the Danish sample is also skewed since the recent outbreaks have been concentrated among younger groups. 3) It has been less than a month since omicron was labelled a variant of concern by the WHO and since there is a lag between a patient catching infection and requiring hospital treatment, data remains limited.
Further on COVID-19, the US has approved Pfizer's drug as the first oral and at-home treatment for people over 12 but the White House has warned that it will take months until the drug is available at large quantities. Also, Philippines has authorised Merck's pill for adult treatments. Meanwhile, new cases continue to rise in Europe with new daily cases in UK exceeding 100,000 for the first time yesterday.
Equities: Yesterday added to the big Tuesday rally with equities higher across the US and Europe. Risk on, with cyclicals and growth beating the tape. Tech and real estate one of the best sectors. The latter is also the sector that has managed best in the December volatility, on the back of its defensive nature and the depressed long end yields. In the US, Dow closed up 0.7%, S&P 500 1%, Nasdaq 1.2% and Russell 2000 0.9%. VIX dipped back below 20. Asian markets moderately higher this morning and US futures point slightly higher.
FI: Neutral risk sentiment yesterday with a modest rise in yields of 1.5bp in German 10Y bonds and 2bp rise in 5Y bonds that saw the highest rise in yields across the curve. ECB's Rehn (dove) said that ECB should react if inflation rises too much which could have added a bit more pressure on the shorter end of the curve fuelling the already ongoing rise in short yields from the morning with increasing French PPI announced.
See also our in-depth Fixed Income morning comment *
FX: The CZK stands out among CEE peers (PLN and HUF) and will likely strengthen further versus peers and EUR.
See also our in-depth FX morning comment *
Credit: Tuesday's positive sentiment extended into Wednesday where iTraxx Xover tightened a further 3bp and Main 0.3bp. Hence, Xover and Main have now almost entirely reversed the widening from the second half of November and are now both tighter than where they opened after the roll in September. HY bonds closed 2bp tighter and IG 0.5bp tighter.
