Overnight Headlines

*Powell places faster bond-buying taper on Fed’s December meeting list

*Oil rises ahead of two-day OPEC+ meeting under Omicron cloud

*USD was mixed after Powell’s pivot on inflation and rising yields

*US stocks tumbled on Powell and Omicron worries

USD had a volatile day softening with the new variant fears, but then gaining as the Fed Chair Powell turned hawkish. Defensive currencies outperformed and risk-sensitive currencies were the laggards. EUR rose from below 1.13 to 1.1383 before falling back sharply on Powell’s comments. The single currency is now back to the close from yesterday at 1.1335. GBP was similarly volatile sliding from 1.3350 to a new cycle at 1.3195 before recovering above 1.33. USD/JPY bounced back after printing a new low below November support at 112.53. AUD and NZD both posted new 12-month lows before rebounding.

US equities reversed Monday’s gains and dropped again as the market was hit by the double whammy of Powell and Omicron risks. The hawkish tone hit growth stocks with the S&P500 and Dow closing 1.9% lower. Cyclicals held up with tech and autos the leading sectors. But stocks are more buoyant this morning on comments by the Israeli health minister that vaccines may protect against the new variant. Futures are in the green with Asian markets reversing negative sentiment.

Market Thoughts – The Powell pivot

Fed Chair Powell officially (and finally) did an about-turn on the long-held contention that inflation would be “transitory”. He said that it was now time to “retire” the word, arguing that new Covid outbreaks are inflationary in nature. He further expressed confidence that the impact of Omicron will be far less than in the spring of 2020. Powell went on to say that it could be appropriate to increase the tapering pace so that bond buying ends a few months earlier.

Has Powell lost his nerve? It all sounds similar to three years ago when he said the Fed’s balance sheet would be reduced on “autopilot” and stocks reacted with horror. Very early indications are that this view is perhaps harsh as stock futures claw back some gains this morning, though this is mainly on more optimistic Covid headlines.

A new Fed timetable now might see QE end in April and three rate hikes next year starting in June. This is more aggressive than the current 55bps priced in by the market until the end of 2022. This should ordinarily support the dollar while not be too comforting for stocks in the long run, with much depending on Omicron in the near-term.

Chart of the Day – S&P500 finds support

We don’t often post a stock index chart. But a seminal announcement from the world’s most powerful central banker (plus Omicron of course) has put equities on a volatile ride recently. The Vix notched its biggest monthly surge since February last year. We also note US consumer confidence slid to a nine-month low in November as accelerated inflation and a pick-up in Covid cases weighed on views about the economy.

Recent consolidation in the S&P500 around 4700 saw a big move to the downside on Friday. Prices tracking sideways for an extended period will normally see range expansion in line with the dominant trend. But the sharp fall has found support near the previous September high around 4550. Yesterday’s low at 4560 sees a broad zone of support with the 50-day SMA also here. The 100-day SMA comes in just below 4500. Near-term resistance is 4631 and 4673.