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Stock Futures Plunge Amid Omicron Concerns


20 December 2021 Written by Naeem Aslam  AvaTrade Chief Market Analyst Naeem Aslam

American and European futures are down today as governments around the world are raising restrictions in order to curb the spread of the Omicron variant. Until the macroeconomic landscape stabilises, investors are acting cautiously and withdrawing their investments from risky investments that are more positively linked to economic growth. As we approach the end of 2021, stock traders face a number of uncertainties, including U.S. Senator Joe Manchin’s decision to reject President Biden’s $2 trillion tax and spending plan. Typically, trading volumes fall during this time of year, which causes even minor factors to cause large swings in stock markets.

Last week, the Dow Jones Industrial Average dropped 1.70%, and the S & P 500 index dipped 1.90%. The Nasdaq, the tech-savvy index, fell about 3%.

Forex

The rise in COVID-19 cases has supported the dollar index, which jumped to 96.629, just below its highest value of 96.938 achieved in November. This is because the U.S. dollar is considered a safe haven commodity and rises in value in times of uncertainty and increased volatility. The euro, on the other hand, fell alongside the pound after the Netherlands imposed a lockdown yesterday and the United Kingdom’s health minister failed to confirm that additional restrictions will not be implemented before the Christmas holidays.

Stock Market

After last week’s slump in stock market indices, investors are hoping for a Santa Claus rally as we approach the end of 2021. The Santa Claus rally has historically occurred during the last five trading days of December and the first two days of January. However, the current situation is out of the ordinary, with coronavirus cases on the rise and central banks becoming more hawkish, because of which investors are likely to remain risk averse until they are reassured by positive economic reports indicating that the American economy is on the path to recovery.

Furthermore, over the last 12 months, we have seen that whenever stock market sentiment falls, dip buying occurs, allowing stock markets to recover. However, that buy the dip strategy was aided by additional liquidity injected by central banks, which will be rapidly withdrawn in 2022. This is yet another reason why we are unlikely to see significant retracements in stock market indices in the near future.

Investors should also note that the stock prices of technology firms are falling. This is because the Fed has decided to taper its massive stimulus at a faster-than-expected pace, implying that interest rates will be raised sooner as well. According to Federal Reserve Governor Christopher Waller, the Fed’s new aggressive plan calls for the first interest rate hike as early as March 2022. Inflation has reached record levels, prompting hawks to seize control of the Fed and begin pushing the brakes on the American economy before it spirals out of control. Higher interest rates adversely affect high-growth companies, whose valuations are primarily based on future cash flows, causing stock prices to fall when central banks become more aggressive. This is what we are witnessing right now.

Omicron

On the other hand, coronavirus cases are continuing to climb as we approach the holidays. The new variant has already been found in 43 states in the United States and in 90 countries. The Omicron variant is also more contagious, doubling the number of cases in 2 to 3 days. These rising cases are likely to cause stock market volatility in the short term as governments struggle to deal with the virus and impose new restrictions, weighing on investor sentiment and share prices.

Cryptocurrencies

Investor sentiment has dropped considerably in the cryptocurrency markets in recent days as a result of the emergence of the Omicron variant and an aggressive Fed. As a result of these developments, investors have become more risk averse, resulting in significant declines in the value of digital coins, as evidenced by the price action of Bitcoin, the king of cryptocurrencies. Bitcoin recently surpassed its historical highs and was trading near $68,000. It is, however, currently hovering around $46,500, well below the critical $50,000 mark.

However, the future outlook for cryptocurrencies and the overall blockchain space remains positive, as companies work hard to find practical applications for the technology and investors now understand the benefits of digital coins better than ever before.

The use of NFTs in the music industry is an example of how the blockchain platform is being used in novel ways. The music industry generates nearly $42 billion in revenue each year, with artist earnings accounting for less than 12% of the total pie. This is the problem that music NFTs are attempting to address. Instead of collecting royalties, artists can use this method to directly upload their music and earn money. This will most likely allow the artists to own their music while also boosting their income.

Asian Pacific Markets

The Chinese economy’s growth has slowed in recent months as a result of crackdowns on the Chinese real estate sector. This situation prompted officials to increase market support by enacting dovish policies. To that end, China’s central bank cut its one-year policy rate for the first time in nearly two years, while keeping its five-year interest rate unchanged.

As of 12.10 a.m. EST, the Nikkei dropped 2.09% and the Shanghai index fell 0.75%. The Hang Seng index, in Hong Kong, dipped 1.44%. The ASX 200 index fell 0.26%, and the Seoul Kospi slumped 1.57%.

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