V for volatility

Markets rebound from omicron panic

The buy-the-dip mafia was out in force yesterday, with a fair bit Friday’s Wall Street and European equity sell-off unwound, as well as Friday moves in bond, currencies and commodities and energy. Notably, it hasn’t been a complete reversal by any means, as the world settles into a choppy holding pattern, for clarity about just worried, or not, we should be about the new Covid-19 omicron variant.

President Biden attempted to soothe nerves overnight, but what really drove the retracement were anecdotal reports from the South African medical establishment suggesting that symptoms were milder than delta. Always ready to selectively edit the facts to fit the prevailing market sentiment, cases popping up in multiple locations around the world (they were probably there already), kneejerk travel bans on travellers from southern Africa (there is no evidence it originated there, they just reported it first), and in the case of Japan, all foreigners, and WHO warnings that the new variant posed a “very high” risk, were mostly ignored by investors worldwide. The fact that markets haven’t completely unwound the Friday meltdowns at least suggests a modicum of caution remains.

To be fair, having been scarred by delta, much of Asia is still in ultra-cautious mode, as their recovery was only just gathering steam with borders being tentatively reopened. And one can’t blame national governments for shooting first and asking questions later, after paying the price so badly for their delta complacency earlier this year. Whether that escalates into wider restrictions than a ban on travellers from Southern Africa also remains to be seen.

It will likely be a couple of weeks before the great and good of the global scientific community can make a definitive judgment on how serious the omicron variant is. That means December is likely to be choppy and driven by omicron headlines, and the heavyweight data calendar this week, will be rendered irrelevant. All that will matter is whether more restrictions are coming back around the world, and whether central banks, especially the Fed, hit the pause button on monetary tightening plans. I already know the answer to that one. The big winner this month will be volatility, we should see plenty of it. But with markets selling everything on negative omicron headlines and clasping at the most tenuous of straws to buy everything back on any perceived positive headlines, investors looking for thematic direction moves this month, are likely to be sorely disappointed.

Markets got nothing out of the stream of Fed speakers overnight, who seemed to be going out of their way to avoid thoughts on omicron-world monetary policy. We have had some heavyweight data from Asia today though, although as I have just mentioned, it has been largely ignored. South Korean and Japanese Industrial Production was released, with the YoY data outperforming, while the MoM prints disappointed. South Korea falling -3.0%, while Japan rose on 1.10%. Electronics continued to perform well, but automotive and transport suffered due to the semiconductor bugbear. A cynic might say that the recoveries in both countries are stalling, much like the recent data from China suggests.

Speaking of China, official Manufacturing and Non-Manufacturing PMIs were released for November this morning. Manufacturing PMI managed to recover marginally into expansionary territory, creeping up to 50.1. that follows a sharp rise in Industrial Profits over the weekend, with metals refining and energy, unsurprisingly, leading the way. The data suggests China isn’t out of the woods yet though, although you wouldn’t bet against them. Non-Manufacturing PMI held steady at 52.3, with Covid-19 restrictions potentially offset by Singles Day. The general PMI rose sharply from 50.8 to 52.2, and overall, the data suggests an improvement driven by an easing of China’s power crunch and a slight easing in lending criteria to the property sector. The data is steady, rather than spectacular, and I won’t be breaking out the champagne yet.

We have a raft of GDPs across the Eurozone, as well as Eurozone November Flash Inflation, and German Unemployment this after. In the US, we have the Case-Shiller Home Price data, as well as CB Consumer Confidence and both Janet Yellen and Jerome Powell are testifying on the Hill I believe. Sadly, unless Mr Powell says the taper will stop if omicron is serious, all of this be ignored. V is for volatility, and there is only one story in town this week, and it is invisible to the human eye.