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.
Receding omicron fears lift equities.
The modest rallies that started yesterday in Asia, continued to gain momentum overnight across Europe and the US, boosted by comments from Dr Anthony Fauci. That let markets get back to their global recovery trade happy place. However, that same sentiment also steepened the US yield curve and turned the focus back to an expectedly hawkish FOMC next week. Travel and leisure rebounded impressively, but the overriding them was one of value outperforming growth, with the Dow Jones having a stellar day versus the Nasdaq.
The S&P 500 rose 1.17% overnight, with the Nasdaq gaining 0.93% and the Dow Jones recording a stellar 1.87% rally. Futures on all three have continued in the same vein in Asia, rising 0.45% today. That has also reversed sentiment in Asia, notably in Japan and Hong Kong, both bastions of fast-money retail traders.
The Nikkei 225 has leapt 2.15% higher, with the Kospi rising 0.55%. In Mainland China, markets were also boosted by the RRR cut and easing lending conditions. The Shanghai Composite is flat, but the narrower Shanghai 50 is 0.65% higher, while the CSI 300 has risen by 0.60%. Property sector fears continue to cap gains on the Mainland. Hong Kong has rallied strongly, rising 1.85% as investors flocked back into China big-tech listings, which have endured torrid recent sessions.
Singapore has risen by 0.35%, with Kuala Lumpur 0.40% higher and Jakarta climbing by 0.70%. Taipei is unchanged while Manila has edged 0.25% lower with Bangkok jumping 1.05% higher. With the RBA also staying unchanged, Australian markets are also staging a strong recovery led by travel and leisure. The ASX 200 and All Ordinaries have risen by 1.05%.
With a dearth of tier-1 data in Europe today, I expect that sentiment will continue to drive market direction and that should see European stocks enjoy another positive start. As ever, the caveat on the equity rally will be if negative omicron headlines start hitting the news wires.
Currency markets content to range trade.
Currency markets showed little reaction to the Fauci omicron comments overnight, having already put the new variant behind it to focus on the upcoming FOMC meeting next week. That sentiment saw the US Dollar drift higher in a benign session, the dollar index rising 0.15% to 96.30 before falling slightly to 96.24 in Asia as currency markets continue to drift.
The Fed taper once again pushed USD/JPY higher as the US yield curve steepened once again overnight, USD/JPY rising 0.60% to 113.50, before adding another 0.20% to 113.70 in Asia. If we have indeed seen “peak omicron,” the 112.50 lows seen last week could well be the lows for the cross for the foreseeable future.
EUR/USD, GBP/USD are marking time around 1.1290 and 1.3285 with both vulnerable to a resumption of their medium-term downtrends next week if the BOE and ECB remain on hold while the FOMC speeds up tapering. AUD/USD rallied 0.40% today to 0.7080 after the RBA remained on hold but left the door slightly cracked for a faster unwinding of loose policy in the future. NZD/USD is treading water at 0.6760 with some Yen cross buying supporting both. Further gains are likely to be harder to come by if the US Dollar remains firm.
The US Dollar has weakened across the board versus Asian currencies thanks to the rebound in investor sentiment on weaker omicron fears. USD/Asia is down approximately 0.15% today in a quiet session. Looking ahead, as the market swings back to pricing in a fast Fed-taper and earlier rate hike life off, the rally by Asian currencies is likely to stall and reverse into next week.
Oil surges on lower omicron concerns.
The Fauci comments overnight saw more fast money returning to the long oil trade as markets started pricing a resumption of the global recovery and higher oil consumption. Brent crude leapt 5.40% higher to $73.65 a barrel, while WTI jumped 5.45% higher to $70.00 a barrel. In Asia, Brent has added 0.55% to $74.05, and WTI has added 0.90% to $70.65 a barrel.
Both contracts have quite a bit more upside potential, assuming the mild omicron reality is correct. The technical indicators are neutral but most especially, despite OPEC+ raising production quotas once again this month, the grouping continues to struggle to even meet its previously outlined increases. Virus volatility aside, that and OPEC+’s optionality over immediately changing the targets from the last meeting, which remains officially open, should provide a healthy modicum of support on any material pullbacks. Oil will be immune to a more hawkish FOMC next week.
Both contracts have recovered above their respective 100-day moving averages and if investor sentiment remains positive Brent crude can retest $76.00 and WTI $73.00 before the end of the week. I continue to believe that the lows of last week could well be the lows for the next year.
Gold remains marooned
Gold had another directionless session as it remains forgotten by the investor community, particularly those bullish traders who have been so badly whipsawed over the last month. Gold drifted 0.30% lower to $1778.50 an ounce overnight as US yield firmed, only to reverse that in Asia, rising 0.20% to $1782.50 an ounce.
In the bigger picture, gold looks set to trade in a rough $1770.00 to $1800.00 an ounce range this week, unable to sustain momentum above or below those levels. The 50,100 and 200-day moving averages (DMAs), clustered between $1791.00 and $1793.50 provides immediate resistance, followed by $1800.00. Support lies at $1770.00 and $1760.00.
Gold could still stage a modest recovery this week, but if the US yield curve continues steepening, that may never eventuate, especially if US CPI data on Friday is likely to print around 7.0%. Gold remains a sell on rallies to $1810.00. The balance of risks still favours a move lower towards $1720.00 an ounce.