Why did omicron spook the markets so much?

The Daily Shot: 29-Nov-21
Equities
Energy
Rates
Cryptocurrency
Emerging Markets
China
Asia – Pacific
Japan
The Eurozone
The United Kingdom
The United States
Food for Thought



 

Equities

1. The news of a COVID variant called omicron spreading in South Africa and elsewhere spooked investors around the world.
 

 
Reopening stocks tumbled, …
 

 
… with airlines getting hit particularly hard.
 

 
Bank shares also underperformed as Treasury yields dropped.
 

 
2. There are two key concerns.
 
Given a large number of mutations on omicron’s spike proteins, will the current vaccines be effective (will the vaccine-induced antibodies recognize the new variant)? We should know within a couple of weeks.
 
Source: NBC News   Read full article  
 
Is the new variant spreading faster than other COVID-19 mutations? Once again, it’s not clear at this point.
 
Source: @financialtimes   Read full article  
 
Anecdotal evidence suggests that the virus is indeed spreading quickly, but symptoms seem to be mild.
 
Source: Haaretz Daily   Read full article  
 
If omicron is no worse than the Delta variant in terms of vaccine effectiveness, the stock market could resume its rally, hitting new highs within weeks. Futures moved higher this morning.
 

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3. Value stocks extended their underperformance on Friday.
 

 
Related to the above, companies with weak balance sheets dropped sharply.
 

 
Small caps declined almost 3.7% on Friday.
 

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4. The ratio of the Nasdaq 100 VIX-equivalent (VXN) to VIX dipped below one again. Tech, especially tech mega-caps, is viewed as a “safe haven” in a lockdown scenario.
 

 
5. Equities have diverged from credit this month.
 

 
6. Flows into stock funds have been unprecedented this year.
 
Source: BofA Global Research, Bloomberg   Read full article  
 
7. Is corporate pricing power reaching its limits?
 
Source: BCA Research  
 
8. Q3 share buyback activity hit a quarterly record.
 
Source: @hsilverb, h/t @Callum_Thomas  
 
9. About half of this year’s $1bn+ global IPOs are trading below their listing price.
 
Source: @financialtimes   Read full article  


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Energy

1. Crude oil tumbled on Friday, with Brent stopping at the 200-day moving average.
 

 

 
The curve flattened (lower backwardation).
 
Source: @aeberman12  
 
Implied vol spiked.
 

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2. Inventories of crude oil and products in the US continue to trend lower.
 
Source: @HFI_Research  
 
3. This chart shows the components of US shale production.
 
Source: Princeton Energy Advisors  
 
US Permian Basin oil production is back to pre-pandemic levels, but total production is lagging.
 
Source: ANZ Research  
 
DUC inventories are now visibly below the recent averages.
 
Source: Princeton Energy Advisors  

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4. Conventional oil fields take much longer to get production going.
 
Source: Wharton   Read full article  
 
5. Finally, this chart shows the global trends in battery storage investment.
 
Source: IEA   Read full article  


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Rates

1. Treasury yields declined sharply on Friday due to omicron fears.
 

 
2. The 20yr Treasury isn’t getting much love.
 
Source: Numera Analytics   Read full article  
 
3. This chart shows the 200-year history of US real rates.
 
Source: BofA Global Research; @carlquintanilla  


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Cryptocurrency

1. Bitcoin is holding support around its 100-day moving average after last week’s sell-off.
 
Source: Dantes Outlook  
 
Ether is also holding support at its 100-day moving average.
 
Source: Dantes Outlook  

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2. Ether (ETH) has outperformed other large cryptocurrencies over the past three months.
 
Source: FinViz  
 
3. Bitcoin’s correlation with stocks remains positive.
 
Source: @technology   Read full article  
 
4. The total number of decentralized finance (DeFi) users in Ethereum has exceeded 4 million.
 
Source: @DuneAnalytics  


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Emerging Markets

1. The JP Morgan EM Currency Index is nearing multi-year lows.
 

 
A number of EM currencies came under pressure this month.
 
The ruble:
 

 
The Mexican peso:
 

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2. EM shares continue to widen their underperformance vs. US equities.
 

 
3. Which EM countries have not yet hiked rates?
 
Source: Oxford Economics  
 
Policy rate changes and inflation vary across EM countries.
 
Source: Oxford Economics  
 
There is a correlation between currency weakness and rate increases.
 
Source: Oxford Economics  

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4. This chart shows median inflation by region.
 
Source: Fitch Ratings  
 
5. Will we see more COVID mutations coming out of Southern African countries? There is an urgent need to boost vaccinations in the region.
 
Source: Numera Analytics  
 
6. Chile’s new legislature appears to be relatively well balanced, which is making markets less jittery about the polarized presidential election runoff next month.
 
Source: @desousacarlos  
 

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7. Mexico’s core CPI climbed above 5.5% for the first time since 2009.
 

 
8. Brazil’s inflation continues to surge.
 

 
Separately, Brazilian equities appear oversold, according to Variant Perception (2 charts).
 
Source: Variant Perception  
 
Source: Variant Perception  

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9. Vietnam’s exports hit a record high.
 


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China

1. Industrial profits remain at multi-year highs for this time of the year.
 

 
2. The World Economics SMI report shows business activity moderating this month as companies are forced to boost prices.
 
Source: World Economics  
 
3. Thermal coal futures saw a “dead-cat” bounce.
 

 
4. Hong Kong’s exports remain robust.
 

 
5. State-owned property firms issued a record amount of onshore debt in November to boost liquidity (as the dollar market froze).
 
Source: Bloomberg   Read full article   Further reading  
 
Here are the offshore bond maturities.
 
Source: Fitch Ratings  


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Asia – Pacific

1. South Korea’s central bank hiked rates again (as expected).
 

 
The central bank boosted its inflation forecasts.
 
Source: Pantheon Macroeconomics  

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2. Taiwan’s industrial production remains exceptionally strong.
 

 
3. Singapore’s inflation continues to rebound.
 

 
4. Next, we have some updates on Australia.
 
Retail sales rebounded in October.
 

 
Corporate profits surprised to the upside again last quarter.
 

 
Softer business investment slowed productivity growth in recent years.
 
Source: BIS   Read full article  

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5. Finally, here are some updates on New Zealand.
 
The RBNZ hiked rates as expected. The 25 bps increase was a bit more cautious than some analysts were expecting.
 

 
Consumer confidence continued to deteriorate this month.
 

 
The trade deficit is moderating.
 


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Japan

1. The November Tokyo CPI showed that Japan remained firmly in deflation this month.
 

 
3. Retail sales have been firming, …
 

 
… although department store sales remain soft.
 

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4. Here is the evolution of business lending since 1970.
 
Source: @bopinion   Read full article  


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The Eurozone

1. Let’s begin with Germany.
 
German stocks sold off sharply on Friday and continue to underperform global peers.
 

 

 
COVID cases have surged, but fatalities remain relatively low.
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital  
 
Germany is importing inflation as import prices rise by nearly 22% vs. last year.
 

 
The Ifo business expectations index deteriorated further amid rising costs and the COVID wave.
 

 
Source: ifo Institute¬†  
 
This chart shows price expectations by sector.
 
Source: ifo Institute¬†  
 
Consumer confidence eased as well.
 

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2. French and Italian sentiment indicators have been resilient.
 
Italian manufacturing confidence:
 

 
Italian consumer confidence:
 

 
French consumer confidence:
 

 
French business confidence:
 

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3. The flash PMI report from Markit surprised to the upside.
 

 
The figures from France were especially strong.
 

 
Business input costs continue to surge.
 


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The United Kingdom

1. The flash PMI report showed manufacturing still lagging services this month.
 
Source: IHS Markit  
 
Input prices are soaring.
 

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2. On the other hand, the CBI industrial orders index hit a record high.
 

 
Price expectations have gone vertical.
 

 
Source: Reuters   Read full article  

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3. Market-based inflation expectations continue to grind higher.
 


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The United States

1. The omicron scare sent rate hike probabilities sharply lower. Nonetheless, the odds of three Fed hikes next year are still above 70%.
 

 
Inflation expectations dropped.
 

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2. Jobless claims remain very low for this time of the year.
 

 
3. Consumer spending continued to climb in October, rising well above the pre-COVID trend.
 

 
The trend doesn’t look as impressive when adjusted for inflation.
 

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4. The core PCE inflation, the Fed’s preferred measure, climbed above 4% for the first time in decades.
 

 
5. Mortgage applications remain exceptionally strong.
 

 
6. US durable goods orders keep climbing. The persistent strength in capital goods orders points to robust business investment.
 

 
7. Morgan Stanley’s GDP forecast for next year is far more bullish than consensus.
 
Source: Morgan Stanley Research  


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Food for Thought

1. Companies with the largest market capitalizations in 2005 and 2021:
 
Source: Statista  
 
2. Demand for children’s video content:
 
Source: @axios   Read full article  
 
3. Deposits and currency held by US households:
 
Source: @LizAnnSonders, @biancoresearch  
 
Households’ ownership of US stocks:
 
Source: Goldman Sachs  
 
US households don’t like bonds:
 
Source: BofA Global Research; @MikeZaccardi  

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4. Road traffic congestion vs. pre-COVID levels:
 
Source: Numera Analytics  
 
5. Vaccine myths:
 
Source: KFF   Read full article  
 
6. Year-over-year changes in cigarette sales:
 
Source: @chartrdaily  
 
7. Using a phone in the bathroom:
 

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