That was a quite one-two punch that caused a 652-point nosedive in the Dow Jones Industrial Average on Tuesday.
First there was Moderna's chief executive saying the omicron variant of coronavirus might really put up a tough fight versus its COVID-19 vaccine. Then Federal Reserve Chair Jerome Powell stunned markets -- and the traders who read his dovish-sounding opening remarks the night before -- with what has been described as a hawkish pivot, as he threw the word 'transitory' to the dustbin of history, said the central bank is likely to accelerate the pace of tapering and cast the new variant as an inflationary risk.
"The takeaway is simple: the Fed has changed their tune very significantly, and realized that in the last month there was plenty of evidence that they were far behind the inflation curve. The shift in view then has some conviction behind it. It would be no surprise to see the markets quickly price in at least three 25bp hikes for 2022 (instead of the two we currently have), if the main downside risks as related to omicron are ruled out," said Alan Ruskin, macro strategist at Deutsche Bank.
Thomas Kee Jr., the president and chief executive of Stock Traders Daily, agreed that Powell made a pivot, and suggested the pace of tapering may double to $30 billion a month. But he said the driving force behind equity infusions is the European Central Bank, not the Fed.
The ECB is also battling inflation -- prices in November surged by the fastest in 30 years -- but central bank officials there are wary of repeating the mistake of premature tightening. The ECB has to decide whether to let the EUR68 billion ($77 billion) a month Pandemic Emergency Purchase Programme expire as planned in March and whether to increase the Asset Purchase Programme as it offers its first staff inflation forecast for 2024.
"Ultimately, the ECB is the wild card, and the decision of the ECB comes in just two weeks," said Kee. Liquidity will remain robust, and that will keep the "bid in equities that exists now going." The free money, he said, hasn't dried up yet.