CAPITALDIGEST, MARKET REPORT 02 DECEMBER 2021

MONDAY 29/11/2021 – STERLING EYES 11-MONTH LOWS ON OMICRON CONCERNS Sterling dived back towards a 11-month low on Monday as investors weighed the discovery of the Omicron coronavirus variant on the outlook for the British economy. While British health authorities have yet to annouce any major increase in COVID restrictions, traders have quietly whittled away at the odds of the Bank of England raising interest rates later this month. “The main risk for the pound aside from the virus backdrop remains the ever-shifting Bank of England outlook with comments from policymakers confusing markets,” Nova Scotia analysts said. The pound slipped 0.2% to $1.3309 in quiet London trading, not far from a December 2020 low of $1.3278 on Friday. Against the euro , it strengthened 0.2% to 84.67 pence. The Omicron variant was first recorded in South Africa last week, prompting countries to rush to tighten border controls and sending markets into a tailspin on Friday. read more A semblance of calm returned on world markets on Monday as investors waited for more details to assess the severity of the Omicron variant. Still, broader sentiment was a bit more cautious towards the pound. “In terms of the outlook, for the UK it’s possibly a bigger risk as the market’s long-held assumption that the UK is unlikely to witness another lockdown,” Jordan Rochester, a strategist at Nomura, said. Investors worry that more lockdowns would water down expectations of rate hikes, a key factor that has held up the pound in recent weeks.   TUESDAY 30/11/2021 – EURO ON TRACK FOR BIGGEST THREE-DAY RISING STREAK OF 2021 The euro surged on Tuesday and was on track for its biggest three-day rising streak this year, as traders cut their short positions on the single currency after Moderna’s CEO said COVID-19 vaccines were unlikely to be as effective against the Omicron variant as they have been with other types. Risk appetite took a battering across all markets for a second day in less than a week after his comments reinforced expectations that the global economy is set for a rocky and longer return to normalcy in the coming months. That was most evident in the jump in the value of the euro on Tuesday as traders rushed to cut their large short bets on the U.S. Federal Reserve raising interest rates quicker than its global peers next year. “This is Round 2 of Omicron jitters evident in the unwinding of short euro/long stock positions,” said Kenneth Broux, an FX strategist at Societe Generale in London. “There is an element of short euro covering as well and the unwinding of U.S. rate hike bets is also undermining the dollar.” Money markets pushed back their expectation of a first, full 25 basis-point rate hike to September 2022, versus July last week. Against the U.S. dollar, the euro rose 0.5% on Tuesday to $1.1367 and was up 1.3% in the last three sessions. At an intraday high of $1.1373 hit earlier, the single currency registered its biggest three-day rising streak since December 2020.   WEDNESDAY 1/12/2021 – STERLING RISES ABOVE 2021 LOWS AS CENTRAL BANK EYED The British pound rose on Wednesday but held near a 2021 low versus the U.S. dollar as doubts grew on whether the Bank of England will raise interest rates at a policy meeting this month. In broadly quiet London trading, sterling edged 0.2% higher to $1.3320 after falling briefly below $1.32 to a fresh 2021 low in volatile trading on Tuesday. Against the euro, the pound rebounded from a two-week low to stand at 85.05 pence. The BoE said in November it would probably have to raise rates from an all-time low of 0.1% “over the coming months”, but policymakers have sounded increasingly divided on this prospect after a new coronavirus variant was detected. Money markets were pricing in only 9 bps of rate hikes by the next meeting on Dec. 16 compared to 8 bps on Tuesday. The dollar failed to capitalise on hawkish comments from the U.S. Federal Reserve Chair Jerome Powell on Tuesday with the greenback slipping 0.2% versus its rivals Powell said asset purchases may need to be tapered faster to fight rising inflation, prompting traders to increase bets of a U.S. rate hike by next June.   THURSDAY 2/12/2021 – U.S. DOLLAR DRIFTS HIGHER; TRADERS EYE NON-FARM PAYROLLS The dollar edged higher on Thursday in choppy trading as risk appetite improved with higher U.S. stocks, although investors remained worried about the fast-spreading Omicron coronavirus variant and the speed at which the U.S. Federal Reserve will taper its asset purchases. The U.S. currency’s moves were limited though, as investors looked ahead to Friday’s non-farm payrolls report for November. “A really strong payrolls report as we’re projecting could be another element to re-asserting the dollar,” said Mazen Issa, senior FX strategist at TD Securities in New York. Wall Street economists have estimated the U.S. economy created 550,000 new jobs last month, a Reuters poll showed. In afternoon trading, the dollar index, which tracks the greenback against six major currencies, rose 0.1% to 96.131 . The index dropped last week after news of Omicron first emerged, although it remains close to a 16-month high of 96.938 hit last month. On Thursday, the United States recorded its second case of the Omicron variant, but that has had muted impact on stocks and other risk assets. “Anecdotal evidence seems to suggest that it may not be as severe as many people feared,” said TD’s Issa. “If there’s anything to take away from all of these is that the impact of the virus’ successive waves tends to be less and less the longer it goes. Yes, it’s still a risk, but vaccine makers are able to adjust to address it,” he added.   FRIDAY 3/12/2021 – STERLING EXTENDS LOSSES AS DOLLAR RISES AFTER U.S. DATA Sterling weakened on Friday as the potential for earlier Federal Reserve interest rate hikes strengthened the dollar, while there was still uncertainty about whether the Bank of England will lift rates this month. BoE policymaker Michael Saunders, who voted for an interest rate hike in November, said on Friday he wanted more information about the impact of the new Omicron coronavirus variant before deciding how to vote this month. read more The dollar rose on Friday after the U.S. jobs report showed solid details that suggested the Fed’s plan to accelerate tapering of its asset purchases and to hike rates next year remained intact. read more Sterling fell 0.6% to $1.3218, close to its lowest level since December 2020 of $1.3194 hit on Tuesday. Against the euro, the pound dropped 0.5% to 85.41 pence, hitting its lowest level since Nov. 12. ING analysts said that the sterling index now “sits not far from (the) mid-range” traded since March. They forecast that dollar strength would be the likely driver of sterling until the Bank of England’s rate decision on Dec. 16. BofA analysts argued that the reaction function of the BoE, which is supposed to show how they balance growth and inflation indicators in their decision about rates, has been changing over time, “becoming more unpredictable.”