Receding concerns

Equity markets jump as Omicron jitters ease

Another day, another directional move by markets on whatever the latest omicron headline is. Following on from yesterday’s indicative news from South Africa that the new Covid-19 variant could be milder than previous versions symptom-wise, much the same message was reinforced by the US’ Dr Anthony Fauci overnight.

That was all markets needed to hear really and equity markets in Europe and the US followed Asia’s lead and piled back in. Unsurprisingly, travel and leisure led the way while technology only rose modestly. When looked at in totality, markets appear to be moving rapidly back into pricing up the Fed taper trade. Value (old boring companies) outperformed growth (exciting technology companies), which makes sense as the US yield curve also steepened once again overnight. The theory being that technology and their ilk, with sky-high valuations, are more sensitive to upward moves in interest rates.

The US dollar and oil also rallied overnight with markets getting back to business as usual. And today in Asia, the region is breathing a sigh of relief with equities performing well across the region. While I hope that we have seen “peak omicron,” if that proves not to be the case, I dread to think about the reversal of direction we will see. As I have previously stated, the winner in December will be volatility and not directional plays. We remain one negative omicron headline away from more of the former, and less of the latter.

That doesn’t mean there is nothing else going on, and a dousing of the omicron fires has allowed other themes to come back into focus. Next week’s FOMC policy meeting will be a critical juncture and the receding omicron threat (allegedly), should allow the FOMC to announce a faster taper and possibly earlier rate hikes. If US CPI prints at 7.0% on Friday, that should be a done deal.

But next week is a veritable all-you-can-eat buffet of central bank decisions. Hungary, Chile, Indonesia, Switzerland, Norway, the European Chief Government Debt Monetiser Bank (ECB), Mexico, Russia and perhaps the most exciting, Turkey. That isn’t an exhaustive list, and the PBOC announces its LPR’s the week after. After yesterday’s RRR cut was announced, the odds are rising of a cut in the 1-year LPR at least. Today, we have Australia, tomorrow India, Canada, Brazil and Poland.

We already know what the ECB, Japan and Australia will do, but the picture is murkier in the Latam, Eastern Europe space where we are likely to see a tightening bias continue. India may hint at a hike in 2022 in a change of direction as stagflationary forces increase. We can safely assume that all of Asia except Singapore and South Korea will be on hold through 2022. Turkey will be the outlier, where a collapsing currency and surging inflation could drive another Erdogan-omics rate cut. The tightening of US monetary policy has not been fully priced or appreciated by markets, and further divergence in that respect from Turkey will continue to make short lira the easiest trade on the planet. I am just pondering where on my 2022 calendar to pencil in USD/TRY at 20.0000.

The situation in China’s property developer sector remains fluid, with Evergrande and Kaisa both looking to restructure their entire debt holdings, including offshore obligations. But highly-leveraged firms within the sector remain in deeply distressed territory with more obligations on offshore debts due this week. The first seeds of a solution appear to be occurring though, led by the RRR cut and debt restructuring hopes. I emphasise hopes as a positive outcome is far from certain. This story still has a lot more to run and any short-term rallies in the mostly Hong Kong-listed sector should be approached with extreme caution.

The Reserve Bank of Australia left policy rates unchanged today as expected. They did leave a glimmer of wiggle room in the accompanying statement to act sooner on rates if required. We can expect similar get-out-of-jail clauses from a few central banks next week, most likely the ECB. The Australian dollar has rallied modestly, but both it and its kiwi cousin remain at the mercy of nervous global risk sentiment, omicron, FOMC, or otherwise.

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