Coronavirus dominated on Friday with notable fears surrounding the new Omicron variant.

Coronavirus dominated on Friday with notable fears surrounding the new Omicron variant.

Low trading volumes after Thanksgiving amplified moves with substantial moves across asset classes. Risk appetite deteriorated sharply amid fears of a serious setback to recovery expectations.

There was a tentative net recovery in conditions on Monday amid hopes that economic restrictions could be avoided. US bond yields declined sharply with the US 10-year yield below 1.50%. Wall Street indices posted hefty losses and European bourses also retreated sharply.

The dollar failed to gain defensive demand and posted sharp losses. The Euro gained from short covering with EUR/USD above 1.1300 before fading on Monday. There were strong yen gains with USD/JPY lows near 113.00 before a recovery. Sterling was hit by risk aversion, but GBP/USD found support close to 1.3300.

Commodity currencies declined sharply as risk conditions dominated with a tentative recovery on Monday.

Euro-zone M3 money supply increased 7.7% in the year to October from 7.5% previously with private loans increasing 4.1% over the year. Economic data had little impact in Europe or US trading with risk conditions dominating market action amid the focus on the Omicron variant.

The Euro posted another round of gains ahead of Friday’s New York open with a further closing of short positions as fresh coronavirus fears undermined confidence in carry trades. Overall risk conditions continued to dominate later in the day, especially with trading volumes curbed in US markets. There were further concerns that the new variant would cause major damage to the global economy. The lack of liquidity also had an important in increasing volatility with one-sided trading.

Euro short covering continued and the dollar failed to gain significant defensive support amid concerns over the US vaccine levels and EUR/USD pushed to highs above the 1.1300 level while commodity currencies declined sharply.

Sentiment stabilised on Monday with hopes that governments would be able to avoid major restrictions, but uncertainty inevitably remained high. EUR/USD retreated to around 1.1265 with markets assessing any comments from Federal Reserve officials and Chair Powell due to testify to Congress on Tuesday.

Risk appetite continued to deteriorate rapidly during Friday with sharp losses across equities and commodities as markets fretted over the risks posed by a new coronavirus variant. There was a sharp retreat in US equity futures and US yields also continued to decline with the 10-year sliding to lows around 1.50%.

Markets were concerned that the new Omicron variant would force the Federal Reserve to change tack and curb monetary tightening. In particular, there were notable doubts whether the Fed would decide to reduce bond purchases at a faster pace.

There was notable defensive support for the yen, especially given the very substantial short yen position in global markets which triggered a sharp round of position adjustment.  In this environment, USD/JPY declined sharply against the yen to lows near 113.00 before stabilising. US yields continued to decline later in the session with the 2-year yield registering the sharpest decline since March 2020 while the S&P 500 index posted a decline of 2.3%.

The dollar rebounded in early Asia on Monday with a strong USD/JPY advance to near 113.90, but was unable to sustain the advance despite a significant recover in US futures and a measured tone in Asian bourses. Yields remained lower and USD/JPY retreated to near 113.20 before a recovery to 113.45 with EUR/JPY around 127.75.

Sterling remained under pressure in early Europe on Friday amid the general slide in risk appetite as markets fretted over risks posed by the new coronavirus variant. GBP/USD posted fresh 2021 lows, but did manage to find support below the 1.3300 level.

Bank of England chief economist Pill stated that the labour market remains strong and there is no evidence of a significant increase in unemployment. He added that the ground had been prepared for policy action and that interest rates will need to rise gradually over the coming months. He also noted that rates can continue to increase if data strengthens and inflation is forecast to remain persistently above target. The comments suggested that he would back a small rate increase in the near term.

The rhetoric could have provided net Sterling support, but risk conditions continued to dominate during the day, especially with a high degree of uncertainty over omicron. GBP/USD did find further support close to 1.3300, while GBP/EUR declined to 1.1780.

The UK government announced some renewed restrictions, although with a clear attempt to avoid economic disruption. There were calmer conditions on Monday with markets waiting for Omicron developments and any hints from the Bank of England on the December meeting.

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