Bulls Are Back Amid Thinning Volumes And Fragile Appetite

Fundamental analysis of Forex market

The European and the US markets rebounded yesterday, as investors shrugged off the worries of omicron, while of course, the news flow is far from ideal. New restriction measures are announced every other day and the impact on the economic activity is real. But despite the new restriction measures, many investors believe that omicron would only have a temporary impact on the economic activity and should not be a problem for the overall positive trend in equities.

Nasdaq for example jumped almost 2.50% yesterday due to a renewed optimism, while the S&P500 closed the session 1.80% higher.

Plus, the US Food and Drug Administration will likely authorize a Covid pill from Pfizer and Merck that would treat Covid-19, and that could be another brake to the pandemic and maybe a new milestone in humanity’s fight against Covid.

Of course, the thinning holiday volumes and the rising volatility is partly responsible for the strong jump in equity prices, as the moves are exacerbated by low liquidities. But the same would be true for the downside corrections. In this context, any price pullback would also be bigger than the normal times. Investors should remain cautious with big ups and downs into the Xmas break, as the tighter Federal Reserve (Fed) pricing remains in play as the US 2-year yield remains upbeat and the US dollar index consolidates above the 96.5 mark, and is set for a further extension toward the 98 level in the coming weeks.

And it’s good news that despite a broadly stronger US dollar, the Turkish lira managed to consolidate yesterday’s gains at about the 12 level. While I expect the lira depreciation to continue in term, the fact that the carry positions have been nicely cleared over last days massive rally should keep the positive momentum much contained in the dollar-try, at least for the next couple of weeks.

Elsewhere, the EURUSD is stuck within the 1.1230-1.1360 range, as the European Central Bank (ECB) hawks would like to take the upper hand due to the rising inflation, but the doves wouldn’t abandon the field as the slowing economic activity due to the omicron wave would prevent the ECB from making any bold move in the coming quarters. Not that the ECB would make any bold moves, but, the bad news support the doves in Europe as the ECB continues downplaying the risks of inflation being ‘not transitory’.

Finally, US crude rallied more than 4% yesterday. The major catalyzer was a better risk appetite, while news that the US crude inventories dropped by almost 4 million barrels certainly gave an extra push to the bulls. Pricewise, we are still below the medium term ascending channel, and within the short-term descending trend band. The actual levels are important for defining where the oil prices will be headed next. There is a chance that a move above the $72 pb mark gives a better hope to the bulls. But, omicron risks are looming, the global economic activity is slowing, and the risk appetite in recovery assets, like oil, remain very much fragile. Today, the more official EIA data is expected to confirm a 2.5 million drop in US crude inventories last week. If this is the case, it means that the US is right tapping into its strategic reserves, as the actual oil supply is clearly not enough to satisfy the market, and well OPEC is not ready to move an inch to make things look better.