LONDON – A rebound in market sentiment continued in early European trading on Wednesday, with world shares set for their biggest two-day jump since November last year as investors became less concerned about the Omicron variant.

World shares plunged at the end of last month when the discovery of a new COVID-19 variant spooked investors. But sentiment has rebounded sharply this week in the absence of indications that the variant would derail the economic recovery.

The STOXX 600 had its biggest daily jump since November 2020 on Tuesday and, despite European stock index futures initially being in the red on Wednesday, at 0901 GMT the STOXX 600 was up 0.4 percent, set for its third consecutive day of gains.

The MSCI world equity index, which tracks shares in 50 countries, was up 0.2 percent – its highest since Nov 26, when Omicron fears first hit markets.

"To be honest, it was more the absence of bad news rather than any concrete good news helping to drive sentiment," wrote Deutsche Bank strategist Jim Reid in a note to clients.

"Every day that passes without a wave of severe cases driven by Omicron is offering more hope that this won't be the curveball to throw the recovery off course."

"Clearly in the very short term uncertainty has risen over the Omicron virus… but overall at this stage we do not believe it will derail the macro picture in the medium-term," said Jeremy Gatto, multi-asset portfolio manager at Unigestion.

Outlook for rates

Oil prices eased as investors waited for more information about the extent to which the variant would impact demand. At 0911 GMT, Brent crude futures were down 0.4 percent and US West Texas Intermediate crude was down 0.5 percent on the day. 

The dollar index was steady around 96.233, while the euro was up 0.1 percent at $1.1283.

The euro-dollar pair has struggled to recover from the 2021 lows it reached in November, hurt by expectations that the US Federal Reserve will tighten monetary policy more quickly than the dovish European Central Bank. 

Last week, Fed Chair Jerome Powell said it might be time to stop seeing inflation as transitory, suggesting the central bank could speed up tapering. 

"The market is pricing between two to three hikes next year now. We think that that pricing is too optimistic. We believe that the Fed will actually be slower to deliver on these rate hikes," said Unigestion's Gatto, adding that this would be supportive for equities.

The US 10-year Treasury yield, which had its biggest weekly drop since June 2020 last week due to a combination of Powell's hawkish comments and fears over Omicron, was a touch lower on Wednesday at 1.4597 percent.

US inflation data is due on Friday.