Omi-whatever

US markets jump as Omicron concerns ease

Overnight, more data from South Africa suggesting omicron symptoms were mild gave a green light for the fast-money gnomes of Wall Street to pile back into the buy every-thing global recovery trade. Helping proceedings was news that a deal had been struck in the US Congress to raise the US debt ceiling, avoiding a potential December default.

US equity markets had a mighty session, with the S&P 500 and Nasdaq enjoying their best days since March. The US yield curve steepened once again while oil prices jumped, and the US dollar maintained its gains. Once again, buy-the-dip has triumphed and in the case of oil, last week was probably the lows for potentially the next 12 months.

I have stated that V for Volatility would be the winner in December, rather than directional momentum, and I believe that still holds true. While the buy everything trade will have its day in the sun for the rest of this week, some serious non-virus risk points are looming. Friday sees US CPI and a print at or above 7.0% is going to raise the heat at next week’s FOMC. We have a central bank policy frenzy next week, but all roads lead to the FOMC. And the odds of faster Fed taper and a signal of earlier rate hikes is rising. Markets continue ignoring this reality at their peril, and if reality bites next Wednesday (US time), the “growth” trade on equities could be in for some tough love.

Another “grey swan” is Russia and Ukraine. The Putin/Biden meeting appeared to be constructive, but the West continues to underestimate the Russian psyche regarding border security, as it does with China. A quick look at the history books will give readers all the answers they need. I will deal with the consequences of an invasion in later newsletters but think USD 150 oil, the mother of all dips to buy in US equities, and Europe paying the price for the strategic ineptitude of tying their energy security to Russia.

Apart from Japan, which slavishly follows the US equity market direction these days, Asia is once again, painting a more cautious picture. China’s property sector is the primary reason, with Evergrande failing to pay its Monday offshore obligations, Kaisa suspending its stock on the HKEX and another developer, China Aoyuan Group stating it cannot guarantee to be able to meet commitments due to liquidity constraints. As the saying goes, “there’s never just one cockroach,” and the list of distressed China developers seems to be growing daily.

Nerves over constrained China growth in 2022 due to an orderly, or disorderly, restructuring of the property developer sector are weighing on Asian markets. Nor has the China technology sector crackdown run its course either, despite plenty of press time that stocks in the sector look like a “bargain.” The light at the end of the tunnel continues to be the train coming the other way and the Financial Times lead story today is that China is preparing a blacklist to tighten restrictions on China tech companies seeking overseas listings.

It is increasingly clear that China is giving the option of Hong Kong or bust with regards to pseudo overseas listings, with the riches of US valuations being closed off. China tech may be trading at a “discount,” a situation I believe will become structurally embedded in their pricing under President Xi’s shared prosperity regime.  As the saying goes, “the market can remain irrational, longer than you can stay solvent.” In the history of investing, never a truer word has been spoken. Thank you, Mr Keynes.

Today’s other risk point in Asia is this afternoon’s Reserve Bank of India policy decision. Despite stagflationary pressures rising once again, the RBI should stay unchanged on policy rates. However, it is the RBI Governor’s statement afterwards that will have markets on tenterhooks as there may be a signal that rate hikes are coming in 2022. That would temporarily boost the rupee, but India equities, bloated with hot money from offshore flooding into the tech-IPO space, may start running for the exit. Another choice saying is that “an emerging market is a market you can’t emerge from in an emergency.” Hints of hawkishness from the RBI could open unveil that reality to offshore investors.

Tonight sees the US Jolts Job Openings data released, expected to show some 10.4 million unfilled jobs in America. That will be another reason for next week’s FOMC to consider the t-word we can’t use to describe inflation now, as even less t-word than previously. US API Crude Inventories posted a surprise 3.1 million barrel drop overnight, and official US Inventory data tonight is expected to show a rise of 2.0 million barrels. A similar fall like the API data overnight will throw more fire on oil’s rally.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was 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 and Channel News Asia as well as in leading print publications such as 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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