Omicron, Inflation, and Interest Rates

 Omicron, Inflation, and Interest Rates

Omicron, Inflation, and Interest Rates.

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Consistent data is confirming that the Omicron variant is less lethal in comparison to previous variants. In South Africa where the variant was first detected there have been no hospitalizations caused by the variant. In often cases, patients have been admitted into hospital from other aliments only to find out they have tested positive to the virus unknowingly. This trend is also providing a glimmer of hope that the end of the pandemic is in sight given how pandemic evolve. The evolvement of pandemics is that as it begins to wind down, the virus or cause of the pandemic tends to be less and less lethal till it eventual ending.

This glimmer of hope is being priced in by financial markets and the return to green of equity markets. Though caution is still crucial as more data is shared, a move lower of the Volatility Index (VIX) from the previous highs is indicating this cautious optimism. Currently trading at 23.80 at the time of print, down 3.39% for the trading day so far, and from the previous highs of above 35, cautious risk-on sentiment is returning to the market.

A key driver to the trading conditions going into the close of the year 2021 and 21Q4 is the trajectory of inflation that is no longer termed “transitory”. Initial fears cast concerns on the possibility of full lockdowns which would have likely halted global  economic recovery across economies. As the inflation rates continue to creep higher and there is less likelihood of lock downs market are turned to Central Banks for the next move.

Interest rate differentials across different money markets create trading arbitrage opportunities across the different financial markets. Therefore the central bankers that signal to likely hike interest rate at a faster pace will likely provide these exchange rate arbitrage opportunities. Therefore inflation and how each Central Bank is likely to respond to it will be a key observation point.

As global economies look to lift off from historically low interest rates, numerous financial assets will likely be affected. For example, the Nasdaq-100 which has enjoyed high valuations for much of its constituents due to lower interest rates in the valuation models will possibly be more volatile on each US Fed interest rate commentary. Markets will also be interested to see how Crypto currencies will perform in this environment.

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Terence Hove

Terence Hove, a Financial Markets Analyst with multi-asset brokerage firm Exness completed his BBusSci: Economics at Monash University. With over 8 year experience within financial service his expertise is well developed in financial markets analytics and trading. Exness is an industry leader that provides reliable online trading in financial markets. Exness offers professional services on the above-mentioned assets, please follow the link to learn more on the offering exness.com

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