News on Wednesday from drugmakers Pfizer and BioNTech that a three-shot course of their COVID-19 vaccine was shown to generate a neutralizing effect against the Omicron variant in a laboratory test has cheered investors and lifted the S&P 500 within 1% of a new record high.
But a note of caution also set in across world markets as governments took fresh steps to contain the spread of the new variant.
Late on Wednesday, British Prime Minister Boris Johnson imposed tougher COVID-19 restrictions in England.
"With Omicron, we still don't know the efficacy of vaccines and spread and nature of this variant," said Guy Miller, chief market strategist at Zurich Insurance Group.
"In the near-term, calling where markets go is challenging. Longer-term, we still have many drivers that favor equities," he said, adding that he expected a strong macro-economic environment next year that should support company earnings.
As risk appetite faltered, risk-sensitive currencies and oil prices also lost some steam.
After bounding 2.6% in three days, the growth-sensitive Australian dollar was flat at $0.7165.
Oil prices dipped as European trade got underway. Brent crude futures fell 0.25% to $75.64 a barrel, U.S. crude dipped 0.11% to $72.29.
Hopes for monetary easing after a cut to banks' reserves ratio this week and fairly benign inflation figures on Thursday lifted Chinese shares and Asian shares outside Japan, which rose 0.6% to a two-week peak.
The blue chip CSI300 index was last up nearly 2% and has gained almost 4% for the week so far. If sustained, that would mark the largest weekly leap since February.
Bonds were nursing losses as hope on the virus outlook left a clearer path to higher rates. Traders' focus turned to the release of U.S. inflation data on Friday and a Federal Reserve meeting next week for indications on hike timing.
Fed funds futures 0#FF: are priced for rates to lift-off next May and on Wednesday two-year Treasury yields touched their highest since March 2020 at 0.7140%.
They were steady at around 0.68% on Thursday and 10-year yields held at 1.50% after a 4.6-basis-point jump on Wednesday.
Economists expect annual headline U.S. inflation to have hit 6.8% last month, though previous readings have surprised on the upside.
"An acceleration in the pace of tapering by the Fed is almost being treated as a foregone conclusion," said analysts at ANZ Bank, and beyond it looms an expectation of higher U.S. interest rates in 2022. "But a strong number could ramp up expectations of a hike in Q2 next year."
In Europe, European Central Bank policymakers are homing in on a temporary increase in their regular bond buying scheme that would still significantly reduce overall debt purchases once its pandemic-fighting scheme ends in March, sources told Reuters.
Elsewhere, the U.S. dollar index hovered at 96.058 and the euro dipped marginally to $1.1320.
The greenback was a fifth of a percent softer at 113.46 yen, while sterling edged off Wednesday's one-year low of $1.31615 overnight with the announcement of the tighter COVID-19 rules.
Gold was steady at $1,782 and ounce and bitcoin looks to have found support around $50,000.
(Reporting by Dhara Ranasinghe Additional reporting by Tom Westbrook in SYDNEY Editing by Mark Potter) ((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))