MARKET WRAPS

Watch For:

Germany Manufacturing Orders/Turnover; Italy Retail Sales; U.K. Car Registrations, Construction PMI, Household Finance Review, CBI Economic Forecast; Eurogroup meeting of eurozone finance ministers; no major corporate updates expected

Opening Call:

Easing fears over the severity of Omicron should help power a rally in European stocks on Monday. In Asia, the mood was more cautious, with major benchmarks mixed. Elsewhere, oil rallied after the Saudis hiked prices; the dollar and Treasury yields gained; and gold was little changed.

Equities:

European stocks are primed for a strong start, with hopes that Omicron isn't fueling a surge in severe Covid-19 infections and a rally in crude prices likely to lift the mood.

Investors are likely to take heart from the results of a recent study that found Omicron may cause less severe Covid-19. The small study of people hospitalized during the current outbreak of Omicron in South Africa found a pattern of milder illness than in previous waves of Covid-19, though the authors, and scientists more broadly, cautioned that it is too early to say for sure if the new fast-spreading strain is less virulent than its predecessors.

And on Sunday, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said on CNN that health experts are studying the variant to learn more about the severity of disease it causes. "Thus far, though it's too early to really make any definitive statements about it, it does not look like there's a great degree of severity to it," he said.

Shares were mixed in Asia on Monday, with Evergrande down more than 10% following the property developer's warning of possible cross-defaults on its dollar bonds after it was asked to repay a $260 million debt obligation. Losses in the region were contained though, helped by rising U.S. equity futures.

"The driver of the whip-saw return of serve omicron headline tennis comes from South Africa, where an article from the South African Medical Research Council, suggests that omicron symptoms were milder than previous incarnations, with hospitalised patients mostly having comorbidities," wrote Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA.

"Of course, the sample size is small, but markets never let "the data" these days get in the way of narrative. Omicron variant milder = U-turn = buy everything."

Forex:

The dollar held firm in Asia as the Omicron variant and the prospects of Fed's potential tightening raise concerns about global growth.

Despite Friday's mixed payrolls report, Capital Economics' Jonathan Petersen said "the bigger picture remains that sustained inflationary pressures in the U.S. are likely to support faster policy normalization by the Fed and keep the dollar strong."

USD/JPY has fallen on concerns about Omicron and the pair may continue to decline to 112.00 this week, said Citi. Yet, aggressive betting against the USD/JPY might not be prudent because concerns about inflation may prompt the Fed and other central banks outside Japan to tighten policy and because prolonged disruption of supply chain is likely to delay the recovery of Japan's trade balance due to sluggish exports, Citi added.

Sterling steadied somewhat in Asia after it fell on Friday as investors walked back expectations for an interest rate rise at the Bank of England's Dec. 16 meeting. This followed remarks from policymaker Michael Saunders, said BMO Capital Markets. Saunders suggested the BOE should delay lifting rates until it understands the impact of Omicron.

But BMO forex strategists said the BOE may have to raise rates more considerably in the first quarter to curb inflation if it holds fire in December. "As such, our current preference would be to look for a short-term buying opportunity in GBP/USD in the low 1.30s." For EUR/GBP, there are near-term selling opportunities in the 0.8550-0.8575 range, the strategists said.

Chinese Premier Li Keqiang's recent remarks to the IMF imply that a targeted reserve-requirement-ratio cut is very likely in the near term, said Goldman Sachs. The premier told IMF managing director, Kristalina Georgieva, in a Dec. 3 video meeting, that Beijing would cut the RRR [which regulates how much cash banks hold as reserves] when appropriate to increase support to the real economy and in particular small businesses.

The net liquidity impact may depend on whether the central bank rolls over its medium-term lending facility in full on Dec. 15, when 950 billion yuan of loans will mature, Goldman Sachs added.

Bonds:

U.S. government bond yields moved higher in Asia after investors drove them to multimonth lows on Friday following the jobs data.

Yields swung between advances and declines after the data but began falling later in the session. While the headline jobs number missed economists' expectations, some analysts and investors said that the increase in labor-force participation and the decline in the unemployment rate are positive signs for the U.S. recovery and unlikely to alter expectations for the Fed's pace of reducing pandemic stimulus measures and raising interest rates.

"The market read past the initial headline number, then realized that some of the details were actually okay," said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities.

Facing the highest inflation in decades, many investors are betting that the Fed will move next year to raise short-term rates above their current level near zero. The yield on the two-year Treasury note, which often climbs when investors anticipate tighter central-bank policies, finished Friday trading at 0.589%, up from around 0.27% entering October.

Commerzbank said the Fed is likely to accelerate the tapering process at its mid-December meeting and end the purchases in March despite the lower-than-expected jobs report.

Senior economist Christoph Balz said that although the 210,000 jobs created looked soft, the details in the report were much better and signaled the labor market continued to recover. The emergence of the Omicron variant poses a risk, but the recovery shouldn't be in danger as recent waves of new infections have had less and less impact on the economy, Balz added.

"The final impetus [for the Fed] is likely to come on Friday from consumer prices for November. The inflation rate has probably risen to its highest level since 1982."

Fixed-income investors face a challenging year in 2022 to generate total returns--which include both capital gains and income--as central banks start removing pandemic-era stimulus, Colin Finlayson, who co-manages the GBP437 million Aegon Strategic Global Bond Fund told Dow Jones Newswires.

He predicts government bond yields will rise next year and corporate credit spreads will widen from current levels as central banks globally scale back quantitative easing and start raising interest rates. This environment isn't particularly favorable for government and corporate bonds, for investment-grade corporate bonds in particular, given their already quite expensive valuations, Finlayson said.

Energy:

Oil prices gained more than 2% in Asia, taking cues from the higher official selling prices set by Saudi Aramco.

"The move suggests that the Saudis have confidence in the demand outlook, and the market appears to be taking comfort in that," said ING, noting that the state-owned oil exporter raised its OSPs for all grades of crude into Asia for January, with its flagship Arab Light grade $0.60/bbl higher on month to $3.30/bbl above the Dubai-Oman benchmark.

Oil futures ended on a mixed note Friday, but suffered their sixth weekly decline in a row - the longest streak of declines in three years - as the emergence of Omicron threatened the outlook for energy demand.

"In a glass half-full version, if the virus is deemed to be less virulent than the Delta variant with current vaccinations remaining effective, the ongoing economic recovery could contribute to price pressures becoming more broad-based," said Mizuho Bank.

Metals:

Gold was little changed after it ended higher on Friday after the disappointing U.S. jobs data.

Demand for safe-haven assets such as gold are likely to be supported in the near term amid concerns over the impact of Omicron on the global economy. "The new variant of the virus, which has meanwhile been detected in the U.S. too, is currently hanging over everything like the sword of Damocles," said Commerzbank.

Copper prices gained on signs of supply disruptions in Peru, with mining company MMG planning to halt production at its Las Bambas mine as road blockades there affect key inputs and restrict metal shipments, said ING.

Stockpiles of about 50,000 tons of copper concentrate have built up at the site, with operations slowing down and production set to stop by mid-December, ING added.

TODAY'S TOP HEADLINES

Small-Cap Stocks Hit Hard by Covid-19 Omicron Variant

The emergence of the Covid-19 Omicron variant has pummeled small-cap stocks.

The Russell 2000 benchmark has dropped 7.4% since Thanksgiving, when the fast-spreading new variant made headlines. Last week, the index fell into a correction, declining more than 10% from its November record. The S&P 500 large-cap index, by comparison, has shed 3.5% since the variant news.

Hedge Funds Suffer Big Losses on Biotech Rout

Biotech stocks have fallen to earth with a thud in 2021 after soaring last year amid excitement over the development of Covid-19 vaccines, dealing big losses to some hedge funds.

The sector is being buffeted by concerns Congress will move to put a lid on drug pricing and a surfeit of early-stage biotech shares as the IPO market booms.

Omicron May Cause Less Severe Covid-19, Small South African Study Finds

A small study of people hospitalized during the current outbreak of the Omicron variant of coronavirus in South Africa found a pattern of milder illness than in previous waves of Covid-19, though the authors, and scientists more broadly, cautioned that it is too early to say for sure if the new fast-spreading strain is less virulent than its predecessors.

In the U.S., federal regulators said Sunday that the Food and Drug Administration is already in conversations about streamlining authorization of revamped vaccines if necessary in response to the new variant. "The FDA will move swiftly and CDC will move swiftly after," Centers for Disease Control and Prevention Director Rochelle Walensky said on ABC's "This Week with George Stephanopoulos," adding that "we're everyday hearing about more and more cases."

Dr. Walensky said the new variant has been identified in about 15 states, but regulators are hopeful that vaccines can work to prevent severe disease and keep people out of the hospital.

U.S. Plans to Fast-Track Revamped Covid-19 Vaccines

The Biden administration is preparing to fast-track authorization of revamped Covid-19 vaccines to combat Omicron as a study from South Africa suggests the fast-spreading variant might cause less severe illness than its predecessors.

Federal regulators on Sunday said cases have been identified in 16 states and that the Food and Drug Administration is already in conversations about streamlining authorization for revamped vaccines. Agency officials have met with vaccine makers and are working to set guidelines for the type of data that will be needed to swiftly evaluate the safety and efficacy of changes to current vaccines.

Chinese Tariffs Fuel Boom in U.S. Trade With Tech Exporter Taiwan

U.S. trade with Taiwan is booming, as the self-governing island cashes in on surging demand for its computer chips and lures factories back from China, where many exports to the U.S. including electronics are subject to 25% tariffs.

Taiwan is now ranked No. 8 globally in trade with the U.S., just behind the U.K. and ahead of Vietnam. It exported a record $72 billion in goods to the U.S. in the 12 months through September. That is up about 70% since 2017, the year before the Trump administration imposed the Chinese tariffs.

Bitcoin Price Tumbles After Wall Street Selloff

Bitcoin and other cryptocurrencies had a roller-coaster weekend, another sign that investors are pulling back from riskier bets after last week's stock-market selloff.

Bitcoin, the largest cryptocurrency by market value, plunged more than 20% to $42,000 at midnight Eastern Time on Saturday before bouncing back somewhat, according to data from CoinDesk. It was trading around $49,200 on Sunday evening, still down about 8% since late Friday and down about 14% since the start of the month.

Bitcoin Buyers Flock to Investment Clubs to Learn Rules of the Road

Shalair Armstrong has a busy life. She runs two chiropractic offices in Boston. She has a teenage son. Still, every weekday morning she makes time to buy some bitcoin within earshot of hundreds of strangers.

Dr. Armstrong hosts a "room" in the audio social-media channel Clubhouse called "WakeUp With Bitcoin." Some mornings, listeners can hear her dog barking. It's a far cry from sitting in an office with your broker.

Russia, India to Reinforce Defense Ties as U.S. Considers Sanctions

Russian President Vladimir Putin is expected to extend his country's close defense ties with India this week on a visit that highlights the challenges facing the U.S. as it courts Indian assistance in countering China.

Mr. Putin and Indian Prime Minister Narendra Modi are expected to sign agreements including one extending military technical cooperation until 2031 and another to produce more than 500,000 Russian-designed rifles in India, according to officials involved in the visit.

China Seeks First Military Base on Africa's Atlantic Coast, U.S. Intelligence Finds

BATA, Equatorial Guinea-Classified American intelligence reports suggest China intends to establish its first permanent military presence on the Atlantic Ocean in the tiny Central African country of Equatorial Guinea, according to U.S. officials.

The officials declined to describe details of the secret intelligence findings. But they said the reports raise the prospect that Chinese warships would be able to rearm and refit opposite the East Coast of the U.S.-a threat that is setting off alarm bells at the White House and Pentagon.

Omicron's Spread Exposes South Africa's Vaccination Struggles, Public Distrust

JOHANNESBURG-South Africa's sputtering Covid-19 vaccine rollout, hampered first by dose shortages and more recently public distrust, has left many of its 60 million people potentially exposed as the new Omicron variant spreads across the country.

In recent days, more people have turned out to get their shots amid warnings from scientists and the World Health Organization about Omicron, which has driven a sharp increase in Covid-19 infections in the country's most populous province of Gauteng, home to Johannesburg, over the past two weeks.

Putin Troop Buildup Near Ukraine Raises Concerns of Potential 2022 Invasion, U.S. Officials Say

WASHINGTON-Russian President Vladimir Putin is amassing a force expected to total 175,000 troops near Russia's border with Ukraine, giving him the capability for a potential invasion of his neighbor by early 2022, administration officials said Friday.

The officials, citing new intelligence reports that include images from spy satellites, said the Russian military buildup differs markedly from an earlier massing of troops in the spring. When completed, they said, it will be twice the size of that previous buildup. In addition, Russia has embarked on a rapid mobilization of reservists.

China Evergrande Shares Fall After Warning on Possible Dollar Bond Defaults

China Evergrande Group's shares fell Monday, following the property developer's warning of possible cross-defaults on its dollar bonds after it was asked to repay a US$260 million debt obligation.

"In light of the current liquidity status of the group, there is no guarantee that the Group will have sufficient funds to continue to perform its financial obligations," Evergrande said in a statement late Friday.

Write to paul.larkins@dowjones.com

Expected Major Events for Monday

00:01/UK: CBI Economic Forecast

07:00/GER: Oct Manufacturing orders

07:00/GER: Oct Manufacturing turnover

08:00/CZE: 3Q Wages

08:00/CZE: Oct Retail trade

08:00/AUT: Nov Wholesale Price Index

08:30/SWE: 3Q Balance of Payments

09:00/ITA: Oct Retail Sales

09:00/UK: Nov UK monthly car registrations figures

09:30/UK: Nov CIPS / Markit Construction PMI

09:30/UK: 3Q Household Finance Review

10:00/GRE: 3Q Provisional GDP

16:59/SWI: 2Q Locational & Consolidated banking statistics

16:59/SWI: 3Q International debt securities statistics

16:59/SWI: 2Q Domestic debt securities statistics

16:59/SWI: 3Q Exchange-traded derivatives statistics

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

December 06, 2021 00:51 ET (05:51 GMT)

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