Dip Buying Short-Lived

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Friday’s dip buying is not proving particularly lucrative for European investors as stocks have given back earlier gains to trade broadly flat on the day. US futures are a little lower ahead of the jobs report.

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Given the seesaw price action over the last week, you'd be forgiven for thinking we're due a day in the green and early in the day, that's the way we were headed. But indices quickly turned south after the open and have gradually eaten away at early gains to trade flat on the day.

Investors are clearly still anxious about the Omicron variant for obvious reasons, despite anecdotal evidence suggesting symptoms are less severe. Higher levels of transmission are a worry but ultimately it will come down to the effectiveness of vaccines, which is the overriding concern currently.

Heading into the weekend when we could get more information on the new strain, it's natural that we're seeing more caution. A slew of negative data releases over the course of the morning doesn't help lift sentiment and may be behind the gradual reversal we've seen in European markets.

Jobs Report Could Hasten Taper And Rate Hike Expectations

There may also be some hesitation ahead of the US jobs report which will come shortly before the bell on Wall Street. A strong jobs report will be great for the economy but piles further pressure on the Fed to tighten monetary policy and get domestic demand-driven inflation under control before more drastic action is needed.

It's clear from comments this week by Chairman Jerome Powell and his colleagues that the plan has changed recently and they now intend to taper faster, raise rates sooner and of course, retire the use of the word transitory. But Omicron could complicate efforts further just as the economic data was starting to catch up. A strong report today leaves the Fed well and truly backed into a corner.

CBRT Interventions As Successful As Its Interest Rate Experiment

The CBRT is back in intervention mode, addressing "unhealthy price formations". Based on the movements in the lira which remains marginally off its all-time lows, it would appear the central bank's interventions are about as effective as its monetary policy experiment. The unconventional approach to managing the lira hasn't been particularly effective in the past and there's no reason to expect it to work out any better this time. Especially in the current global economic and inflationary environment.

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OPEC+ Puts Temporary Floor Under Oil Prices

Oil prices are up a little over 2% at the end of the week, buoyed by the caveat in the OPEC+ statement that allows them to make immediate adjustments before the next meeting should they see fit once more information on Omicron is available.

The group has previously stated that winter surges were baked into their forecasts but Omicron threatens to be much more than that if it evades vaccines and the flexibility was probably necessary to keep all parties on board with raising output as planned in January. Whether it will be utilized will depend on the data in the coming weeks.

Oil may have bottomed for now, with price drops towards the lows being met with fear of an immediate adjustment. Markets have tested these warnings in the past though and I expect we'll see just that if the evidence turns out to be concerning. Rallies may struggle to gather too much momentum in the near term as well, although positive news on the variant will be a very bullish development.

Omicron Is Negative For Gold

Gold is steady ahead of the jobs report but continues to trade with a slightly negative undertone despite risk appetite being fragile at best and the dollar a little softer over the last week or so. A flattening of the yield curve is weighing on the yellow metal and a strong jobs report today could further exacerbate its woes.

Of course, there are multiple factors to watch at the minute as far as gold is concerned but the fact that the central bank's hands are tied means bad news on the Omicron variant may not be as bullish for gold as it has in the past. Unless, of course, the central bank prioritizes the economy over inflation which would be a massive risk.

Bitcoin Volatility Will Return

Bitcoin has been quite stable over the last few days as the dust has settled on the Omicron shock and traders await more information. It's not often that bitcoin has appeared steady compared with stock markets but this is one of those rare occasions. But if the news is bad, I expect it will suffer along with other risk assets and volatility will quickly return.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

Article By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

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