Shooting first, asking questions later

Omicron send markets tumbling

That was pretty much the response of both national governments and financial markets on Friday as fears over the new Omicron Covid-19 variant swept the world. Travel restrictions from Southern Africa have been quickly erected with Israel shutting borders full stop. In financial markets, US bond yields sank as investors rushed for safety (bond prices move inversely to yields), oil prices collapsed by over 9.0%, stock markets headed south with commodity prices and haven currencies such as the Swiss franc and Japanese yen have banner days as markets priced in a return to wider movement restrictions.

Having been burnt so badly with their own complacency over the emergence of the delta variant, national governments were taking no chances this time around. Interestingly, both gold and bitcoin flopped as well, and it seems neither is a haven or an inflation hedge when the flag really goes up. Looking at the performance of the platinum group metals on Friday, I am not really surprised that gold sank. But I also suspect that quite a bit of cross margin liquidation accounted for the sell-down in gold and cryptos.

As the week starts a new, it is a very mixed performance in Asia today. Over the weekend, the WHO said that omicron’s symptoms appear to be mild, and the head of Moderna said a newly rejigged version of their vaccine could be available by early 2022. That seems to have been enough to flush out the perpetual optimists of the US stock market, with US index futures strongly rallying this morning. Oil has leapt 4.0% higher as well, recouping nearly half of Friday’s losses. US 10-year T-note futures fell by over 1.0% on Friday (percentage of the price, not headline yield), but have fallen 0.35% this morning, meaning US 10-year yields have edged back up, and the US dollar, having crumpled on Friday, perhaps the day’s biggest surprise, is stronger across the board.

If US-dominated markets are attracting the buy-the-dippers like flies to a fresh pile of dung, the picture is rather more cautious in early Asian markets. Australia, Japan, and South Korean stock markets are all lower, and sentiment barometers, the Australian and New Zealand dollars have hardly moved. Gold spiked lower to USD 1770.00 an ounce when the margin servers went on at 0700 Tokyo, but quickly bounced back to be unchanged at USD 1793.00 an ounce. Some poor soul has been stopped out in the Monday twilight zone.

Asia’s caution is understandable. Memories are still raw in the region of the delta wave earlier this year, including the author. Asia has a much higher beta to world trade and the global recovery than the US where the majority of GDP is internally generated. Having moved heaven and earth over the past six months to get vaccination rates across the region to impressive levels, the prospect of them being rendered useless and trade suffering is understandably weighing on sentiment. The first move in early Asia on Monday is often the wrong one. If that plays true today, the early optimism shown in the most illiquid time of the week for global markets, could evaporate as the day goes on. It is hard to see Europe for example, already facing another Covid-19 wave and more restrictions, suddenly finding light at the end of the virus tunnel.

The fact is, we don’t know enough about this new variant yet to make a conclusive call on whether this is delta 2.0, or a more benign version. That uncertainly alone should cap optimism but-the-dip waves this week, although the annoying use of “mutant virus” or “mutant strain” has reappeared in the global press as if we were facing the zombie apocalypse. That won’t calm nerves but even as a non-scientist I can tell you that every time a virus mutates it becomes a mutated strain, not a “mutant strain” leading the world to doom. Flu evolves every year in multiple strains (hence we need a flu shot every year), but it’s not a “mutant flu.” So, stop scaring people to sell column inches. That said, viruses don’t mutate to become worse at what they do, and if this version is subsuming delta, itself a nasty beast, caution is warranted.

Viruses aside, the world does move on and although omicron will capture the hearts and imaginations and column inches of the world and the financial market this week, there is other stuff happening. China releases official PMIs tomorrow and Caixin Manufacturing PMI on Wednesday, and Services PMI on Friday. Wednesday the 1st also sees the usual dump of PMIs for the rest of Asia and Europe, which also sees Eurozone Inflation and pan-Europe Retail Sales on Friday. South Korean Industrial Production and Retail Sale will generate some attention, as will Australian Retail Sales and Balance of Trade.

Believe it or not, this week is also a US Non-Farm Payroll week, usually the one ring to rule them all. The street is pricing in another 500K+ jump in jobs although its impact is totally reliant on the evolution of the omicron situation. If that has faded and payrolls are strong, we will be back to the Fed taper-trade. If it hasn’t, then it will be ignored no matter what the headline number is, as the street prices in central banks everywhere, including the Fed, breaking the glass, and hitting the big red “WIMP” button.

Speaking of central bankers, we have a plethora of them speaking tonight in the early hours before Asia. The ECB’s Christine Lagarde and the Federal Reserve’s Jerome Powell and the Reserve Bank of Australia’s Debelle all speak. We have a rent-a-crowd of Fed Governors, Clarida, Williams and Bowman also making speeches. We already know what the only question will be to all of them. Expect to hear lots of x central bank stands ready if needed, we have lots of tools available, monetary policy remains flexible, insert we’ll loosen policy at the first sign of trouble comment without specifically saying it here. That might be good for stocks, commodities, and bonds if you are brave.

Bitcoin

The weekend worries unwound all of bitcoin’s 7.0% loss on Friday, as the power of buy-the-dip dangles an irresistible lure. Bitcoin is trading at USD 57.330.00 in Asia, barely changed from the weekend session and has quite a solid line of resistance just above here at around USD 58,500.00 of fiat US currency. A rise through USD 58,500.00 signals a return to USD 60,000.00 in the first instance.

Bitcoin has successfully held its 100-DMA, today at USD 54,210.00 for three sessions in a row. My bearish radar won’t shout target acquired until we see a daily close well below that level. But if we do, a move below USD 50,000.00 is possible.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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