Hope rally turns choppy as hot U.S. inflation looms

Sydney, Dec. 9 (BNA): Stocks rose in choppy trading on Thursday as concerns eased over the economic impact of the coronavirus variable Omicron, but increased caution ahead of US inflation data limited other risk assets such as oil and the Australian dollar.

Bonds have been nursing losses since the brighter outlook for the virus left a clearer path to higher rates. Traders’ focus turned to the release of inflation data on Friday and the Federal Reserve’s meeting next week for clues as to the timing of the rally, according to Reuters.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5% to a two-week high. Japan’s Nikkei was flat, having gained 3.5% in the previous two sessions.

S&P 500 futures were flat after the cash index rose 0.3% overnight to 1% from a new record high.

“Volatility remains elevated as news continues to distill around Omicron,” ANZ Bank analysts said, and beyond that looms an anticipation of higher US interest rates in 2022.

“The acceleration of tapering is being treated by the Fed as an inevitable outcome. But the strong number could raise expectations for a hike in the second quarter of next year.”

On Wednesday, BioNTech and Pfizer said a three-shot course of the COVID-19 vaccine was able to neutralize the Omicron variant in a lab test.

Market sentiment also rebounded with other bits of preliminary data indicating that Omicron is less severe than initially feared, although this has led to stricter restrictions being imposed in England to limit the spread of Omicron.

The Australian dollar rose 2.6% in three sessions and settled at $0.7166 in early trading on Thursday.

Brent crude added $10 a barrel from a three-and-a-half month low last week and settled at $75.82.

The Chinese yuan settled at 6.3458 per dollar after hitting a three-and-a-half-year high of 6.3438 on Wednesday, with a move to ease monetary policy from next week seen as supporting the Chinese economy.

Thursday’s data showed that the pace of factory price hikes in China slowed last month, with the annual pace continuing at 12.9%, while inflation rose to 2.3% on an annual basis.

The main event scheduled for this week is Friday’s US inflation data, which is seen as a prelude to the Federal Reserve’s December meeting next week.

Fed fund futures are priced to raise interest rates next May, and on Wednesday, two-year Treasury yields touched their highest since March 2020 at 0.7140%. They settled at 0.6955% on Thursday and the 10-year bond yields settled at 1.5332% after rising 4.6 basis points on Wednesday.

Economists expect the headline annual inflation in the US to come in at 6.8% last month, although previous readings surprised to the upside.

“A 7 as the big number could be good for dollar bulls getting two-year Treasury yields pumped up,” said Chris Weston, head of research at broker Pepperstone.

“But I think we need a much steeper US Treasury yield curve to convince us to improve growth in 2022.”

Wednesday’s moves were not enough to support the dollar, which fell sharply against the euro to trade at $1.1333 by Thursday morning.

Elsewhere in currency trading, the yen fell below its 50-day moving average to 113.76 against the dollar. Sterling fell to a one-year low of $1,31615 overnight with the announcement of the tightening of COVID-19 rules.

The US dollar index is hovering at 96.029.

It recovered slightly to $1.3197 on Thursday.

Gold was stable at $1,783 an ounce and it appears that Bitcoin has found ground at around $50,000.

HF