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The S&P 500 surged the most in nine months on Tuesday, capping a two-day rally ignited by tentative, early signals that the Omicron COVID-19 variant won’t cause major economic damage.

The benchmark U.S. stock index, as well as the Dow Jones Industrial Average, have both now nearly recouped all losses suffered since the world learned of the emergence of the new variant in late November.

Nevertheless, investors continue to expect volatility in the days ahead as more is learned about the fast-spreading variant and how it may change the trajectory of the pandemic.

“This is still an extremely fragile market but the early signs are offering some hope,” Craig Erlam, senior market analyst with Oanda, a foreign exchange firm, said in a note. “The initial announcement a couple of weeks ago had investors fearing the worst and so far, that’s not what we’re seeing.”

Before markets opened Tuesday, GlaxoSmithKline PLC said an antibody-based COVID-19 therapy it is developing with Vir Biotechnology Inc. was effective against all mutations of the Omicron variant.

That news added to the relief rally along with infectious-disease official Anthony Fauci’s comment on Tuesday that while preliminary evidence indicates Omicron likely has a higher degree of transmissibility, it appears to be less severe. Dr. Fauci had made similar comments on Sunday. Health officials in South Africa have also stated that Omicron cases in the country had shown only mild symptoms so far.

Portfolio managers did not want to be left behind in an impressive rally, helping drive equities higher, said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

“Did the seasonal Santa Claus rally, which we typically have at some point in December, start yesterday?” he said. “There’s certainly fear of missing out.”

The Dow Jones Industrial Average rose 492.4 points, or 1.4 per cent, to 35,719.43 – less than 100 points away from where it closed on Nov. 24, just prior to news emerging of the new variant. The S&P 500 gained 95.08 points, or 2.1 per cent, to 4,686.75 – about 15 points away from its Nov. 24 close. The Nasdaq Composite added 461.76 points, or 3 per cent, to 15,686.92.

Intel Corp.’s announcement of plans to take its self-driving car unit Mobileye public in the United States next year pushed its shares to a 3-per-cent gain and cheered chip investors across the board on Wall Street. The Philadelphia SE Semiconductor index closed up 5 per cent after hitting a near one-month low on Tuesday.

The CBOE volatility index, often referred to as the Wall Street fear gauge, eased from a more than 10-month high last week. It ended the day down 19.5 points at 21.89, its lowest close since Oct. 6.

All of the 11 major S&P 500 sectors advanced, with the information technology sector closing up 3.5 per cent for its biggest one-day percentage gain since March 9, with consumer discretionary following suit with a 2.4-per-cent gain.

The S&P/TSX Composite Index ended up 301.55 points, or 1.5 per cent, at 21,162.65, still well below its closing level of 21,548.43 on Nov. 24. That followed a 1.1-per-cent gain on Monday.

The TSX energy sector advanced 3.1 per cent as oil prices settled 3.7 per cent higher at US$72.05 a barrel. Consumer discretionary shares gained 2.2 per cent, while the technology sector ended 2.8 per cent higher.

“People referred to this period as a Santa Claus rally and I see some of that taking place now as we hit the end of the year,” Irwin Michael, a portfolio manager at ABC Funds, told Reuters. “Investors who were heavy in cash, or who missed the market might feel compelled to invest money.”

The appetite for more risk was also on display in currency and bond markets.

The Canadian dollar strengthened to a two-week high against its U.S. counterpart, aided in part by data showing Canada posting its biggest trade surplus in nearly a decade.

The loonie was trading 0.8 per cent higher at 79.07 US cents by late Tuesday, its biggest gain since Sept. 23. The currency touched its strongest intraday level since Nov. 22 at 79.16 US cents.

Investors had worried in recent days that governments could impose fresh restrictions to curb the spread of the new variant. But the Reserve Bank of Australia expressed confidence that the variant would not thwart economic recovery, helping to boost confidence that other central banks – including Canada’s – would take a similar view.

The Bank of Canada is due to make an interest rate announcement on Wednesday. Money markets expect a rate hike in March, which is an earlier time frame than the central bank has been guiding.

Canada posted a trade surplus of $2.1-billion in October, with imports and exports both hitting record levels on higher trade in motor vehicles.

The benchmark U.S. 10-year Treasury yield rose for a second consecutive day on Tuesday. The yield on 10-year Treasury notes was up 4.8 basis points to 1.482 per cent. (There are 100 basis points in a percentage point.)

The yield on the 10-year had its biggest weekly drop since June, 2020, last week after comments from Federal Reserve chair Jerome Powell took a more hawkish tone and concerns over the Omicron variant rattled markets. The central bank is scheduled to hold its final policy meeting of the year next week.

“We had a bit of a knee-jerk reaction last week from the market about the Fed; really the market taking a couple of days to digest the idea that tapering is going to finish sooner and therefore the rate hikes are going to begin sooner,” said Seema Shah, chief strategist at Principal Global Investors in London.

“But as we start to see some of the challenges from Omicron hopefully lifting, as well as continued evidence the economy is pretty strong, then you should hopefully start to see some of that strength return to the market and that should see bond yields come up a bit from here.”

With files from Reuters

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