Stocks Fall Back on Omicron and Inflation Concerns
5:03 pm Tuesday, November 30th, 2021
U.S. stocks and global oil prices posted their second significant decline in three trading days, reflecting growing concerns about the economic impact of a new Covid-19 variant.
De-risking efforts are broad-based: all 11 S&P 500 sectors are down between 1.0% (real estate) and 2.6% (communication services), the 10-yr yield is down nine basis points to 1.44%, and oil prices are down 6.0% to $65.80/bbl. The CBEO Volatility Index has spiked above 27.00, signaling increased hedging interest against further downside.
The first catalyst was Moderna’s (MRNA) CEO saying he expects that current vaccines will be materially less effective against the Omicron variant. The second, and main catalyst now, was a comment from Fed Chair Powell before the Senate Banking Committee that it’s time to retire the word “transitory” when talking about inflation.
That translates to the Fed potentially speeding up its taper plan so it can get to raising rates to keep inflation check, even as the Omicron variant poses economic risks. Fed Chair Powell supported this thinking with a statement that the central bank will talk about a faster taper plan at the next policy meeting.
The 2-yr yield is currently up three basis points to 1.54% after trading at 1.43% prior to the comments. According to the CME FedWatch Tool, the probability for a rate hike in May has increased to 46.0% from 34.3% yesterday, and the probability for a rate hike in June has increased to 68.9% from 58.5% yesterday.
Other negative factors stem from the economic front, which could be further impacted by the Omicron variant. The Conference Board’s Consumer Confidence Index dropped to 109.5 in November (consensus 111.0) from 111.6 in October, and Chicago PMI dropped to 61.8 in November (consensus 67.0) from 68.4 in October.
Notably, Apple (AAPL) was doing its best to mitigate the losses in the large-cap indices with a 2% gain.
