Overnight Headlines

*Risk sentiment turn gloomy as Moderna Chief predicts existing vaccines will struggle

*President Biden warns against Omicron panic, pledges no new lockdowns

*USD is mixed as safe havens (JPY, CHF) go bid

*Oil falls over 2%, below 200-day SMA towards $71

USD recovered from two days of losses yesterday as risk sentiment picked up. But this morning, it has done an about-turn on new fears about the Omicron virus being more resistant against current vaccines. The euro rebound is gathering steam with Friday’s top at 1.1332 in sight. USD/JPY is threatening recent lows again below 113. This month’s trough and near-term support is 112.72. The commod$s are faring badly this morning with AUD and NZD posting new lows for the move.

US equities rebounded on Monday following Friday’s sharp selloff. The S&P500 added 1.3%, recovering from some of the 2.3% losses from Friday.  Financials and industrials continue to lag suggesting markets are still positioning for the possibility of new lockdowns. Asian markets are lower on the Moderna headlines. US futures are firmly in the red, down around 1%.

Market Thoughts – Variant volatility in full effect

Well, we actually did get a decent bid yesterday in markets. This went against what we wrote in the Week Ahead. Markets seemed to be relying on anecdotal evidence from one South African doctor who said symptoms were mild in the cases she had dealt with. But this positive mood didn’t last too long as US and European futures are negative on the back of downbeat comments from the Moderna chief.

He foresees a “material drop” in the effectiveness of current jabs. The CEO also warned it would take months before drug companies can manufacture new variant-specific jabs at scale.  These comments come as other public health experts and politicians have tried to strike a more positive tone.

JPY, CHF and EUR are in demand again while oil is dropping perilously away from long-term support. Much depends on the scientists which we were led to believe would take a few weeks in determining solid conclusions. In the meantime, there will be much speculation and comment to whip up volatility. Central bankers will also be wary as the trade off between growth/employment and inflation becomes increasingly tricky to deal with.

Chart of the Day – USD/JPY rebound struggling

JPY is in favour again this morning as market sentiment turns shaky. This is likely to be the case going into year-end until uncertainty around variant transmissibility and vaccine efficacy clears. We note that seasonal trends in the dollar are negative.

USD/JPY broke to new cycle highs on Wednesday last week at 115.52. Long-term resistance in the mid-114s seemed to be cleared. But the huge move down on Friday took us back into the lower end of the recent range and through trendline support. We are currently trading just below the October low at 113.25 and the 50-day SMA. Support at the November lows around 112.72/77 is key for more downside. Ahead of this sits Fib support at 112.92. Bears will target 112 if we lose this.