Sive Morten
Special Consultant to the FPA
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Fundamentals
So, guys, we're gradually coming to an end of this difficult year. This week we haven't got a lot of statistics. Mostly it was final revision of IIIQ GDP which barely makes impact on the markets. PCE data that we've got just has confirmed the same "inflationary" sentiment as it was higher than expected and brought no new questions to suggested Fed policy. This week the "Omicron" becomes the primary topic and it seems that "masters" have decided to play this card at maximum.
Market overview
The U.S. dollar hovered near its highest point in 17 months against major peers on Monday after Federal Reserve officials signalled a first pandemic-era interest rate increase could come as early as March. The euro sank with the British pound after the Netherlands went into lockdown on Sunday and Britain's health minister declined to rule out further restrictions before Christmas amid the rapid spread of the Omicron coronavirus variant.
Although COVID-19 restrictions cloud the outlook for economic growth, they also risk keeping inflation elevated and turning central banks more hawkish.
Fed Governor Chris Waller, a known hawk, said on Friday that he thought a rate increase in March would be "very likely" and that the central bank could start to run down it balance sheet in mid-2022. Meanwhile, erstwhile dove Mary Daly, president of the San Francisco Fed, refused to rule out a March increase and voiced support for as many as three increases next year.
Chris Weston, head of research at brokerage Pepperstone in Melbourne, warned that despite the tailwind from an increasingly hawkish Fed, the dollar may be vulnerable to a retracement.
The dollar softened a little on Tuesday in the wake of improving market appetite for risk assets and currencies, extending its overnight losses following a blow to Democratic spending plans in Washington. Monday's loses came after U.S. Senator Joe Manchin, a moderate Democrat who is key to President Joe Biden's hopes of passing a $1.75 trillion domestic investment bill - known as Build Back Better - said on Sunday he would not support the package.
The pound was soft at $1.3213 after British Prime Minister Boris Johnson said on Monday he would tighten coronavirus curbs to slow the spread of the Omicron variant if needed. Omicron infections, which are multiplying rapidly across Europe and the United States, and doubling every two or three days in London and elsewhere, caused a sharp sell-off in share markets on Monday as well as oil.
Market players struggled to point to a clear reason for the "risk on" mood, saying markets were struggling to assess the consequences of the Omicron variant of COVID-19, leading to unseasonable volatility.
The safe-haven dollar languished near an almost one-week low against its major peers on Thursday as investors adopted a more optimistic stance about the global economic outlook, despite the rapid spread of the Omicron coronavirus variant.
Data on Wednesday showed U.S. consumer confidence improving more than expected in December, suggesting the economy would continue to expand in 2022 despite a resurgence in COVID-19 infections and reduced stimulus spending
The Conference Board said on Wednesday its consumer confidence index increased to a reading of 115.8 this month from an upwardly revised 111.9 in November. Economists polled by Reuters had forecast the index rising to 110.8 from the previously reported reading of 109.5 in November.
Many analysts expect the dollar to strengthen in coming months after a hawkish tilt this month at the Federal Reserve put an interest-rate increase in March on the table, setting the U.S. central bank apart from more dovish peers in Europe, Japan, Australia and elsewhere.
Omicron spreads faster than Delta but is less likely to land you in hospital. The UK now has more than 100,000 cases of Omicron. China's Xian city has locked down 13 million residents. But a third Astra Zeneca shot offers protection. And so on. But... whatever. Markets seem to be reposing their trust in companies, politicians, central bankers and doctors to ensure Omicron doesn't get in the way of fat investment returns and economic recovery. Wednesday's U.S. data painted a picture of a highly resilient economy expanding at the fastest since 1984. Markets seem to be winding down for the year however; stock futures are flatlining, the dollar is near one-week lows.
The risk of needing to stay in hospital for patients with the Omicron variant of COVID-19 is 40-45% lower than for patients with the Delta variant, according to research by London's Imperial College published on Wednesday.
European government bond yields continued to tick up as the trickle of risk sentiment flowing back into the market reduced the need for safe-haven debt. Germany's 10-year Bund yields hit -0.284%, their highest since late November. Meanwhile the main U.S. benchmarks ended higher overnight after data showed U.S. consumer confidence improved further in December, and the White House said it was resuming talks on a massive social spending and climate change bill with holdout senator Joe Manchin.
Separately, data on Thursday showed the number of Americans filing new claims for unemployment benefits held below pre-pandemic levels last week, while consumer spending increased solidly, putting the economy on track for a strong finish to 2021. But price pressures continued to build, with a measure of underlying inflation recording its largest annual increase since 1989 in November.
Central banks, the developed world's most reliable group of bond buyers, could slash debt purchases next year by as much as $2 trillion across the four big advanced economies, implying a potentially hefty rise in many governments' borrowing costs.
For years, but particularly since the COVID-19 pandemic erupted in March 2020, central banks have effectively backstopped government spending, mopping up a significant proportion of the debt hitting markets and preventing yields from rising too high. But if central banks set a schedule for unwinding pandemic-era stimulus, a dearth of highly-rated bonds, especially in Europe, may turn into an excess.
JPMorgan estimates central bank bond demand across the United States, Britain, Japan and the euro zone will drop by $2 trillion in 2022 following a $1.7 trillion reduction this year. It expects U.S., German and British 10-year yields to rise 75, 45 and 55 basis points respectively by end-2022, although it did not specify the impact of supply on bonds. Globally, JPMorgan predicts central banks will lead a roughly $3 trillion drop in bond buying, translating into an average yield rise of 20-25 basis points.
Gross UK government borrowing plans imply an average 120 billion pounds in annual net issuance over the next four years, levels not seen since 2011, says RLAM's Inches. He expects 10-year yields to double by end-2022 from roughly 0.75% now .
In the euro zone, yield premiums may rise 20-30 bps, according to Ralf Preusser, global head of rates research at BofA.
Overall euro supply, including European Union bonds, will be the highest since 2015 at 157 billion euros, BNP Paribas' head of strategy for G10 rates, Europe, Camille de Courcel said.
U.S. supply may be lighter.
ING analysts say the wind-down of Fed purchases amounting to $1 trillion annualized will be offset by a $1.5 trillion drop in Treasury net issuance. That means "overall net supply pressure will shrink by some $0.5 trillion", they told clients.
With perennial overseas demand for Treasuries, that should cap 10-year yields - a Reuters poll sees end-2022 levels of 2.08% while most banks expect around 2.25%. That is around 85 bps higher than now, notwithstanding a Fed taper and three likely rate hikes.
Omicron is marching across the Globe
Commercial airlines around the world canceled more than 4,500 flights over the Christmas weekend, as a mounting wave of COVID-19 infections driven by the Omicron variant created greater uncertainty and misery for holiday travelers. Airline carriers globally scrapped at least 2,401 flights on Friday, which fell on Christmas Eve and is typically a heavy day for air travel, according to a running tally on the flight-tracking website FlightAware.com. Nearly 10,000 more flights were delayed.
Commercial air traffic within the United States and into or out of the country accounted for more than a quarter of all the canceled flights over the weekend, FlightAware data showed. Among the first U.S. carriers to report a wave of holiday weekend cancellations were United Airlines and Delta Air Lines, which scrubbed nearly 280 flights combined on Friday alone, citing personnel shortages amid the surge of COVID-19 infections.
COVID-19 infections have surged in the United States in recent days due to the highly transmissible variant Omicron, which was first detected in November and now accounts for nearly three-quarters of U.S. cases and as many as 90% in some areas, such as the Eastern Seaboard.
The average number of new U.S. coronavirus cases has risen 45% to 179,000 per day over the past week, according to a Reuters tally. New York reported more than 44,000 newly confirmed infections on Friday alone, shattering that state's daily record. At least 10 other states set new one-day case records on Thursday or Friday.
Rising hospitalizations were hitting healthcare systems especially hard in the U.S. Midwest, with intensive care units in Indiana, Ohio and Michigan bracing for the worst even as they remain under pressure from an earlier wave of Delta variant cases.
In Britain, many industries and transport networks were struggling with staff shortages as sick workers self-isolated, while hospitals have warned of the risk of an impact on patient safety. One in 20 Londoners had COVID-19 last week, a figure that could rise to one in 10 by early next week, according to data released on Thursday by the Office for National Statistics.
However, Prime Minister Boris Johnson, who has staked considerable political capital on the Christmas of 2021 being "considerably better" than the previous year, on Tuesday ruled out new restrictions before the day itself, saying that there was uncertainty about the severity of Omicron and hospitalization rates. Government data showed a record tally of 122,186 new infections nationwide on Friday, marking a third day in which the number of known cases has surpassed 100,000.
While recent research suggests Omicron produces milder illness, and a lower rate of hospitalizations, than previous variants of COVID-19, health officials have maintained a cautious note about the outlook.
France hit another COVID-19 infection record on Friday, with its daily tally exceeding 94,000 while hospitalizations from the virus reached a seven-month high, prompting the government to convene a special meeting for Monday that could trigger new public health restrictions
Europeans face an uncertain winter with coronavirus infections, deaths and hospital admissions hurtling past previous highs in many countries. Europe is once again the epicentre of the global pandemic, with 56 out of every 100 new infections globally now reported from countries in the region, according to a Reuters tally.
It wasn’t supposed to be this way.
Almost a year after coronavirus vaccines became available and with high vaccine uptake in several European countries, most hoped for a return to a more normal holiday season. But as the new, highly contagious Omicron variant of the virus spreads rapidly through the region, several European countries have reintroduced lockdown restrictions ahead of Christmas and New Year celebrations.
COVID-19 deaths and infections have surged in countries with low vaccination rates, but waning immunity among those inoculated early and relaxed curbs over the summer have exposed even areas with high uptake of vaccines.
Before vaccination programs were underway, infections peaked in November 2020. The peak of deaths followed a couple of months later. But the overall success of the vaccine program severed this pattern and deaths have remained below the pre-vaccination peak since inoculations reached 10% of the European population.
Some countries saw a reduction in death rates to below 25% of their pre-10% vaccination peak. Portugal, where the current double vaccination rate is 89%, saw deaths in this recent winter wave drop to 7% of last winter's peak. A handful of countries with high vaccination rates did, however, experience death rates of at least the same magnitude as their pre-vaccination peaks. Despite 71% of the population being double vaccinated, Norway has recently seen deaths rise to over 130% of its pre-vaccination peak.
European countries with low vaccinations are also seeing rising coronavirus infections lead to mounting hospitalizations. The European Centre for Disease Prevention and Control (ECDC) said that without further measures to reduce social contact or increased booster vaccinations the levels of transmission could overwhelm healthcare systems. With pressure rising on hospitals, towards the end of November, the Netherlands began sending COVID-19 patients across the border to Germany. The Netherlands has since entered into a fourth lockdown to prevent its healthcare system from being overwhelmed.
Omicron, a very contagious coronavirus variant, first detected last month in Southern Africa and Hong Kong, has raced around the globe and through Europe. According to the World Health Organization (WHO) infections are doubling in 1.5 to 3 days in areas with community transmission of the variant. In England, Omicron's transmissibility is already outpacing previous variants.
In addition to the recent push for mask wearing, social distancing measures and vaccine passports, many European countries are rolling out vaccine boosters to protect against Omicron and reduce winter waves of COVID-19.
Preliminary data shows vaccines are less effective against Omicron, but a booster increases protection. The EU's Health Commissioner Stella Kyriakides has warned of difficult months ahead, but vaccine boosters could be the region's "wave-breaker" against Omicron.
With the big central bank decisions out of the way, investors can now entirely focus on COVID-19 developments. And what they're seeing isn't looking good. The Dutch are in a lockdown, Europeans face new restrictions, and officials are urging Americans to get booster shots -- developments that are dashing hopes the end of the pandemic could be closer.
The fear is that hospitalizations and deaths from Omicron could still put national health systems under pressure, given the rapid speed at which it spreads even though symptoms are mild. Add to that last week's hawkish pivot by the Federal Reserve, fresh hurdles facing U.S. President Joe Biden's $1.75 trillion investment bill, then worries over growth and confidence look well placed. Indeed, Goldman Sachs was quick off the blocks to trim U.S. growth forecasts for most of next year.
Conclusion
So, recent data that we've got brings no changes to economic environment and investors' opinion, concerning future Fed policy. Overall numbers are good in terms of consumer mood and spending, although PCE data shows a bit stronger numbers. Excess of bonds' supply in 2022 should not have significant impact on currency balance because of more aggressive Fed policy, compares to other central banks. Thus, expectations of 2.08-2.25% interest rates next year more than enough overcome effect of possible ECB measures and jump of the interest rates. From this standpoint we do not see any reasons to change our long-term view on the US Dollar domination in 2022.
Another question is Omicron fears. With the recent two weeks, markets were struggling with uncertainty on whether Omicron is good or bad, scaring and for how much. Once the news with Omicron have appeared - there was an attempt to play it out fast to withdraw this news. Delta variant was the most dangerous one and market were dealing somehow with it. But, now it seems that this attempt was stopped and world was forced with the opinion that Omicron is very dangerous. Masters have decided to play this card at full capacity. Now you could see the effect across the Globe - new lockdowns, broken holidays, boosting acceleration etc.
In general, this way of events agrees with our theory that US tries to use pandemic to stop China growth, with keeping artificial supply problems and sabotaging normal cargo transferring across the world. First fruits already have been achieved as growth has slowed, inflation and unemployment increases and PBoC has cut the rate for the first time after long period of stability.
The rush that we see around Omicron across the Globe makes us think that this topic hardly will be withdrawn after the holidays and fully will be used to keep restrictions and limitations, supporting fears among population as pandemic should last. It makes us think that current relief on FX market is temporal and with new Omicron fears the status quo should be re-established. It seems that risk aversion happens too early and demand for the US Dollar should start rising again. It means that current upside bounce is temporal and long-term bearish trend on EUR/USD still stands valid.
So, guys, we're gradually coming to an end of this difficult year. This week we haven't got a lot of statistics. Mostly it was final revision of IIIQ GDP which barely makes impact on the markets. PCE data that we've got just has confirmed the same "inflationary" sentiment as it was higher than expected and brought no new questions to suggested Fed policy. This week the "Omicron" becomes the primary topic and it seems that "masters" have decided to play this card at maximum.
Market overview
The U.S. dollar hovered near its highest point in 17 months against major peers on Monday after Federal Reserve officials signalled a first pandemic-era interest rate increase could come as early as March. The euro sank with the British pound after the Netherlands went into lockdown on Sunday and Britain's health minister declined to rule out further restrictions before Christmas amid the rapid spread of the Omicron coronavirus variant.
Although COVID-19 restrictions cloud the outlook for economic growth, they also risk keeping inflation elevated and turning central banks more hawkish.
Fed Governor Chris Waller, a known hawk, said on Friday that he thought a rate increase in March would be "very likely" and that the central bank could start to run down it balance sheet in mid-2022. Meanwhile, erstwhile dove Mary Daly, president of the San Francisco Fed, refused to rule out a March increase and voiced support for as many as three increases next year.
The Fed's rapid hawkish tilt combined with Omicron's troubling spread intensified a risk-off mood, which led investors to squirrel away their capital in safe havens, including Treasuries and the dollar, with moves exacerbated by year-end profit taking, said Ken Cheug, chief Asian foreign-exchange strategist at Mizuho Bank.
Chris Weston, head of research at brokerage Pepperstone in Melbourne, warned that despite the tailwind from an increasingly hawkish Fed, the dollar may be vulnerable to a retracement.
"Positioning is skewed long in USDs, so the prospect of position squaring into year-end is elevated," Weston wrote in a client note. "While central bank actions are the real issue, headlines on Omicron could be seen as the smoking gun for position squaring."
The dollar softened a little on Tuesday in the wake of improving market appetite for risk assets and currencies, extending its overnight losses following a blow to Democratic spending plans in Washington. Monday's loses came after U.S. Senator Joe Manchin, a moderate Democrat who is key to President Joe Biden's hopes of passing a $1.75 trillion domestic investment bill - known as Build Back Better - said on Sunday he would not support the package.
"The dollar pulled back on the breakdown of Build Back Better. Less stimulus, weaker growth, and rates dropping at the short-end was enough to push the dollar slightly lower," said Kyle Rodda, an analyst at IG markets.
The pound was soft at $1.3213 after British Prime Minister Boris Johnson said on Monday he would tighten coronavirus curbs to slow the spread of the Omicron variant if needed. Omicron infections, which are multiplying rapidly across Europe and the United States, and doubling every two or three days in London and elsewhere, caused a sharp sell-off in share markets on Monday as well as oil.
Market players struggled to point to a clear reason for the "risk on" mood, saying markets were struggling to assess the consequences of the Omicron variant of COVID-19, leading to unseasonable volatility.
While the weeks either side of Christmas are typically low in volatility for currencies and other asset classes, analysts at ING said, "This year some seasonal tendencies will be mixed with the Omicron variant threatening to force new restrictions and markets still processing a week full of key central bank decisions."
The safe-haven dollar languished near an almost one-week low against its major peers on Thursday as investors adopted a more optimistic stance about the global economic outlook, despite the rapid spread of the Omicron coronavirus variant.
Data on Wednesday showed U.S. consumer confidence improving more than expected in December, suggesting the economy would continue to expand in 2022 despite a resurgence in COVID-19 infections and reduced stimulus spending
The Conference Board said on Wednesday its consumer confidence index increased to a reading of 115.8 this month from an upwardly revised 111.9 in November. Economists polled by Reuters had forecast the index rising to 110.8 from the previously reported reading of 109.5 in November.
Many analysts expect the dollar to strengthen in coming months after a hawkish tilt this month at the Federal Reserve put an interest-rate increase in March on the table, setting the U.S. central bank apart from more dovish peers in Europe, Japan, Australia and elsewhere.
"With recent Fed speak indicating that March is live, we continue to think risk/reward favors respecting that outcome and hence supporting USD firmness in the new year," TD Securities strategists wrote in a report. Ongoing data strength should help bolster Fed pricing, particularly amid reports that Omicron appears to be leading to fewer hospitalizations," they said. In the near term, however, the dollar is likely to consolidate within a $1.12 to $1.14 range against the euro, they said.
Omicron spreads faster than Delta but is less likely to land you in hospital. The UK now has more than 100,000 cases of Omicron. China's Xian city has locked down 13 million residents. But a third Astra Zeneca shot offers protection. And so on. But... whatever. Markets seem to be reposing their trust in companies, politicians, central bankers and doctors to ensure Omicron doesn't get in the way of fat investment returns and economic recovery. Wednesday's U.S. data painted a picture of a highly resilient economy expanding at the fastest since 1984. Markets seem to be winding down for the year however; stock futures are flatlining, the dollar is near one-week lows.
"The recent health data from the UK and other places around the world indicate that the worst case is unlikely: even though (Omicron) transmission rates are reportedly higher, this variant seems less virulent and less prone to cause serious illnesses or death," said David Chao, global market strategist Asia Pacific at Invesco.
The risk of needing to stay in hospital for patients with the Omicron variant of COVID-19 is 40-45% lower than for patients with the Delta variant, according to research by London's Imperial College published on Wednesday.
European government bond yields continued to tick up as the trickle of risk sentiment flowing back into the market reduced the need for safe-haven debt. Germany's 10-year Bund yields hit -0.284%, their highest since late November. Meanwhile the main U.S. benchmarks ended higher overnight after data showed U.S. consumer confidence improved further in December, and the White House said it was resuming talks on a massive social spending and climate change bill with holdout senator Joe Manchin.
"Worries about the severity of the Omicron variant are fading, which is buoying demand for riskier currencies and asset classes whilst weighing on safe havens like the US dollar, Japanese yen and sovereign bonds," George Vessey, a strategist with Western Union Business Solutions, said in a note.
Separately, data on Thursday showed the number of Americans filing new claims for unemployment benefits held below pre-pandemic levels last week, while consumer spending increased solidly, putting the economy on track for a strong finish to 2021. But price pressures continued to build, with a measure of underlying inflation recording its largest annual increase since 1989 in November.
"The most popular motivation (for the rally) is the growing perception that Omicron is less lethal. This certainty helped risk appetite return, but self-fulfilling expectations of Christmas rallies and reduced liquidity also came in play," said Giuseppe Sersale, fund manager at Anthilia in Milan. I still think the news on Omicron is good, but not as good as the market is taking it. So it really depends on how much the contagions will fly," he added.
Central banks, the developed world's most reliable group of bond buyers, could slash debt purchases next year by as much as $2 trillion across the four big advanced economies, implying a potentially hefty rise in many governments' borrowing costs.
For years, but particularly since the COVID-19 pandemic erupted in March 2020, central banks have effectively backstopped government spending, mopping up a significant proportion of the debt hitting markets and preventing yields from rising too high. But if central banks set a schedule for unwinding pandemic-era stimulus, a dearth of highly-rated bonds, especially in Europe, may turn into an excess.
JPMorgan estimates central bank bond demand across the United States, Britain, Japan and the euro zone will drop by $2 trillion in 2022 following a $1.7 trillion reduction this year. It expects U.S., German and British 10-year yields to rise 75, 45 and 55 basis points respectively by end-2022, although it did not specify the impact of supply on bonds. Globally, JPMorgan predicts central banks will lead a roughly $3 trillion drop in bond buying, translating into an average yield rise of 20-25 basis points.
"I am not suggesting next year is going to be bond Armageddon - but you've got a period where inflation is still stubbornly high, central banks are behind the curve in terms of raising interest rates, and at the same time you've got large net supply," said Craig Inches, head of rates and cash at Royal London Asset Management. That's quite a heady mix for bond markets."
Gross UK government borrowing plans imply an average 120 billion pounds in annual net issuance over the next four years, levels not seen since 2011, says RLAM's Inches. He expects 10-year yields to double by end-2022 from roughly 0.75% now .
In the euro zone, yield premiums may rise 20-30 bps, according to Ralf Preusser, global head of rates research at BofA.
If markets are correct in pricing a complete end to asset purchases next year, "the rate shock becomes even bigger and risks being a very significant chunk of positive net issuance that we would need to absorb for the first time since the European sovereign (debt) crisis," Preusser said. "Spreads in Europe are not priced for that," he added.
Overall euro supply, including European Union bonds, will be the highest since 2015 at 157 billion euros, BNP Paribas' head of strategy for G10 rates, Europe, Camille de Courcel said.
U.S. supply may be lighter.
ING analysts say the wind-down of Fed purchases amounting to $1 trillion annualized will be offset by a $1.5 trillion drop in Treasury net issuance. That means "overall net supply pressure will shrink by some $0.5 trillion", they told clients.
With perennial overseas demand for Treasuries, that should cap 10-year yields - a Reuters poll sees end-2022 levels of 2.08% while most banks expect around 2.25%. That is around 85 bps higher than now, notwithstanding a Fed taper and three likely rate hikes.
Omicron is marching across the Globe
Commercial airlines around the world canceled more than 4,500 flights over the Christmas weekend, as a mounting wave of COVID-19 infections driven by the Omicron variant created greater uncertainty and misery for holiday travelers. Airline carriers globally scrapped at least 2,401 flights on Friday, which fell on Christmas Eve and is typically a heavy day for air travel, according to a running tally on the flight-tracking website FlightAware.com. Nearly 10,000 more flights were delayed.
Commercial air traffic within the United States and into or out of the country accounted for more than a quarter of all the canceled flights over the weekend, FlightAware data showed. Among the first U.S. carriers to report a wave of holiday weekend cancellations were United Airlines and Delta Air Lines, which scrubbed nearly 280 flights combined on Friday alone, citing personnel shortages amid the surge of COVID-19 infections.
COVID-19 infections have surged in the United States in recent days due to the highly transmissible variant Omicron, which was first detected in November and now accounts for nearly three-quarters of U.S. cases and as many as 90% in some areas, such as the Eastern Seaboard.
The average number of new U.S. coronavirus cases has risen 45% to 179,000 per day over the past week, according to a Reuters tally. New York reported more than 44,000 newly confirmed infections on Friday alone, shattering that state's daily record. At least 10 other states set new one-day case records on Thursday or Friday.
Rising hospitalizations were hitting healthcare systems especially hard in the U.S. Midwest, with intensive care units in Indiana, Ohio and Michigan bracing for the worst even as they remain under pressure from an earlier wave of Delta variant cases.
In Britain, many industries and transport networks were struggling with staff shortages as sick workers self-isolated, while hospitals have warned of the risk of an impact on patient safety. One in 20 Londoners had COVID-19 last week, a figure that could rise to one in 10 by early next week, according to data released on Thursday by the Office for National Statistics.
However, Prime Minister Boris Johnson, who has staked considerable political capital on the Christmas of 2021 being "considerably better" than the previous year, on Tuesday ruled out new restrictions before the day itself, saying that there was uncertainty about the severity of Omicron and hospitalization rates. Government data showed a record tally of 122,186 new infections nationwide on Friday, marking a third day in which the number of known cases has surpassed 100,000.
While recent research suggests Omicron produces milder illness, and a lower rate of hospitalizations, than previous variants of COVID-19, health officials have maintained a cautious note about the outlook.
"There is a glimmer of Christmas hope ... but it definitely isn't yet at the point where we could downgrade that serious threat," Jenny Harries, head of the UK Health Security Agency, told the BBC.
France hit another COVID-19 infection record on Friday, with its daily tally exceeding 94,000 while hospitalizations from the virus reached a seven-month high, prompting the government to convene a special meeting for Monday that could trigger new public health restrictions
Europeans face an uncertain winter with coronavirus infections, deaths and hospital admissions hurtling past previous highs in many countries. Europe is once again the epicentre of the global pandemic, with 56 out of every 100 new infections globally now reported from countries in the region, according to a Reuters tally.
It wasn’t supposed to be this way.
Almost a year after coronavirus vaccines became available and with high vaccine uptake in several European countries, most hoped for a return to a more normal holiday season. But as the new, highly contagious Omicron variant of the virus spreads rapidly through the region, several European countries have reintroduced lockdown restrictions ahead of Christmas and New Year celebrations.
COVID-19 deaths and infections have surged in countries with low vaccination rates, but waning immunity among those inoculated early and relaxed curbs over the summer have exposed even areas with high uptake of vaccines.
Before vaccination programs were underway, infections peaked in November 2020. The peak of deaths followed a couple of months later. But the overall success of the vaccine program severed this pattern and deaths have remained below the pre-vaccination peak since inoculations reached 10% of the European population.
Some countries saw a reduction in death rates to below 25% of their pre-10% vaccination peak. Portugal, where the current double vaccination rate is 89%, saw deaths in this recent winter wave drop to 7% of last winter's peak. A handful of countries with high vaccination rates did, however, experience death rates of at least the same magnitude as their pre-vaccination peaks. Despite 71% of the population being double vaccinated, Norway has recently seen deaths rise to over 130% of its pre-vaccination peak.
European countries with low vaccinations are also seeing rising coronavirus infections lead to mounting hospitalizations. The European Centre for Disease Prevention and Control (ECDC) said that without further measures to reduce social contact or increased booster vaccinations the levels of transmission could overwhelm healthcare systems. With pressure rising on hospitals, towards the end of November, the Netherlands began sending COVID-19 patients across the border to Germany. The Netherlands has since entered into a fourth lockdown to prevent its healthcare system from being overwhelmed.
Omicron, a very contagious coronavirus variant, first detected last month in Southern Africa and Hong Kong, has raced around the globe and through Europe. According to the World Health Organization (WHO) infections are doubling in 1.5 to 3 days in areas with community transmission of the variant. In England, Omicron's transmissibility is already outpacing previous variants.
In addition to the recent push for mask wearing, social distancing measures and vaccine passports, many European countries are rolling out vaccine boosters to protect against Omicron and reduce winter waves of COVID-19.
Preliminary data shows vaccines are less effective against Omicron, but a booster increases protection. The EU's Health Commissioner Stella Kyriakides has warned of difficult months ahead, but vaccine boosters could be the region's "wave-breaker" against Omicron.
With the big central bank decisions out of the way, investors can now entirely focus on COVID-19 developments. And what they're seeing isn't looking good. The Dutch are in a lockdown, Europeans face new restrictions, and officials are urging Americans to get booster shots -- developments that are dashing hopes the end of the pandemic could be closer.
The fear is that hospitalizations and deaths from Omicron could still put national health systems under pressure, given the rapid speed at which it spreads even though symptoms are mild. Add to that last week's hawkish pivot by the Federal Reserve, fresh hurdles facing U.S. President Joe Biden's $1.75 trillion investment bill, then worries over growth and confidence look well placed. Indeed, Goldman Sachs was quick off the blocks to trim U.S. growth forecasts for most of next year.
Conclusion
So, recent data that we've got brings no changes to economic environment and investors' opinion, concerning future Fed policy. Overall numbers are good in terms of consumer mood and spending, although PCE data shows a bit stronger numbers. Excess of bonds' supply in 2022 should not have significant impact on currency balance because of more aggressive Fed policy, compares to other central banks. Thus, expectations of 2.08-2.25% interest rates next year more than enough overcome effect of possible ECB measures and jump of the interest rates. From this standpoint we do not see any reasons to change our long-term view on the US Dollar domination in 2022.
Another question is Omicron fears. With the recent two weeks, markets were struggling with uncertainty on whether Omicron is good or bad, scaring and for how much. Once the news with Omicron have appeared - there was an attempt to play it out fast to withdraw this news. Delta variant was the most dangerous one and market were dealing somehow with it. But, now it seems that this attempt was stopped and world was forced with the opinion that Omicron is very dangerous. Masters have decided to play this card at full capacity. Now you could see the effect across the Globe - new lockdowns, broken holidays, boosting acceleration etc.
In general, this way of events agrees with our theory that US tries to use pandemic to stop China growth, with keeping artificial supply problems and sabotaging normal cargo transferring across the world. First fruits already have been achieved as growth has slowed, inflation and unemployment increases and PBoC has cut the rate for the first time after long period of stability.
The rush that we see around Omicron across the Globe makes us think that this topic hardly will be withdrawn after the holidays and fully will be used to keep restrictions and limitations, supporting fears among population as pandemic should last. It makes us think that current relief on FX market is temporal and with new Omicron fears the status quo should be re-established. It seems that risk aversion happens too early and demand for the US Dollar should start rising again. It means that current upside bounce is temporal and long-term bearish trend on EUR/USD still stands valid.