MKT CALL: MACRO OVERVIEW:
- Omicron variant concerns are plaguing risk assets, but the VIX futures and options expiry is mid-week, potentially clearing the path for risk assets to rally through the end of the year.
- Fed hike odds have slumped and the US Treasury yield curve has flattened, holding back the US Dollar (via the DXY Index) from fresh yearly highs.
- Gold prices can’t seem to gain any traction despite last week’s bullish outside engulfing bar.
Thin Markets Around the Holidays
In this week’s edition of MKT Call: Macro (formerly The Macro Setup), we discussed how mega cap tech stocks are masking disappointing breadth in US stock indices, what cryptocurrency markets’ recent struggles mean for forecasters expecting bigger gains in 2021, and the evolution of Fed hike odds and their impact on FX markets. Whether or not Santa Claus comes to deliver a rally in risk assets – particularly US stock markets – is very much in question.
Of course, much of recent price action in global financial markets has been influenced by concerns around the COVID-19 omicron variant, which is spreading more rapidly than any other strain throughout the pandemic thus far. But data from South Africa suggests that, while more transmissible, omicron is proving far less lethal than other variants (delta included), suggesting that this most recent surge in infections may not have a longstanding impact on global growth – which has been downgraded in recent weeks.
Markets seem to be looking past the omicron variant in many respects, particularly when it comes to what central banks will be doing in 2022. Instead, with several central banks – the Federal Reserve included – predicting aggressive rate hike cycles in order to combat high inflation, it may be the case that markets are starting to price in slower growth over the next few years.
Indeed, despite the Fed outlining six rate hikes through the end of 2023, rates markets are actually pricing in fewer rate hikes today than they were ahead of the December Fed meeting. Eurodollar contract spreads are discounting approximately 15-bps fewer through the end of 2023 than they were at the start of the month, and with the US Treasury yield curve flattening, the US Dollar (via the DXY Index) has been held back from further advances in the near-term.
*For commentary from Dan Nathan, Guy Adami, and myself on the US Dollar (via the DXY Index), the US S&P 500, gold prices, Bitcoin, among others, please watch the video embedded at the top of this article.
CHARTS OF THE WEEK
Eurodollar Futures Contract Spread (JANUARY 2022-DECEMBER 2023) [ORANGE], US 2s5s10s Butterfly [BLUE], DXY Index [WHITE]: DailyTIMEFRAME(AUGUST 2021 to DECEMBER 2021) (Chart 1)
GOLD PRICE TECHNICAL ANALYSIS: DAILY TIMEFRAME (MAY 2020 TO DECEMBER 2021) (CHART 2)
DXY PRICE TECHNICAL ANALYSIS: DAILY TIMEFRAME (JULY 2020 TO DECMEBER 2021) (CHART 3)
— Written by Christopher Vecchio, CFA, Senior Strategist