Shooting first, asking questions later

That was pretty much the response of both national governments and financial markets on Friday as fears over the new Omicron Covid-19 variant swept the world. Travel restrictions from Southern Africa have been quickly erected with Israel shutting borders full stop. In financial markets, US bond yields sank as investors rushed for safety (bond prices move inversely to yields), oil prices collapsed by over 9.0%, stock markets headed south with commodity prices and haven currencies such as the Swiss Franc and Japanese Yen has banner days as markets priced in a return to wider movement restrictions.

Having been burnt so badly with their own complacency over the emergence of the delta variant, national governments were taking no chances this time around. Interestingly, both gold and bitcoin flopped as well, and it seems neither is a haven or an inflation hedge when the flag really goes up. Looking at the performance of the platinum group metals on Friday, I am not really surprised that gold sank. But I also suspect that quite a bit of cross margin liquidation accounted for the sell-down in gold and cryptos.

As the week starts a new, it is a very mixed performance in Asia today. Over the weekend, the WHO said that omicron’s symptoms appear to be mild, and the head of Moderna said a newly rejigged version of their vaccine could be available by early 2022. That seems to have been enough to flush out the perpetual optimists of the US stock market, with US index futures strongly rallying this morning. Oil has leapt 4.0% higher as well, recouping nearly half of Friday’s losses. US 10-year T-note futures fell by over 1.0% on Friday (percentage of the price, not headline yield), but have fallen 0.35% this morning, meaning US 10-year yields have edged back up, and the US Dollar, having crumpled on Friday, perhaps the day’s biggest surprise, is stronger across the board.

If US-dominated markets are attracting the buy-the-dippers like flies to a fresh pile of dung, the picture is rather more cautious in early Asian markets. Australia, Japan, and South Korean stock markets are all lower, and sentiment barometers, the Australian and New Zealand Dollars have hardly moved. Gold spiked lower to $1770.00 an ounce when the margin servers went on at 0700 Tokyo, but quickly bounced back to be unchanged at $1793.00 an ounce. Some poor soul has been stopped out in the Monday twilight zone.

Asia’s caution is understandable. Memories are still raw in the region of the delta wave earlier this year, including the author. Asia has a much higher beta to world trade and the global recovery than the US where the majority of GDP is internally generated. Having moved heaven and earth over the past six months to get vaccination rates across the region to impressive levels, the prospect of them being rendered useless and trade suffering is understandably weighing on sentiment. The first move in early Asia on Monday is often the wrong one. If that plays true today, the early optimism shown in the most illiquid time of the week for global markets, could evaporate as the day goes on. It is hard to see Europe for example, already facing another Covid-19 wave and more restrictions, suddenly finding light at the end of the virus tunnel.

The fact is, we don’t know enough about this new variant yet to make a conclusive call on whether this is delta 2.0, or a more benign version. That uncertainly alone should cap optimism but-the-dip waves this week, although the annoying use of “mutant virus” or “mutant strain” has reappeared in the global press as if we were facing the zombie apocalypse. That won’t calm nerves but even as a non-scientist I can tell you that every time a virus mutates it becomes a mutated strain, not a “mutant strain” leading the world to doom. Flu evolves every year in multiple strains (hence we need a flu shot every year), but its not a “mutant flu.” So, stop scaring people to sell column inches. That said, viruses don’Viruses aside, the world does move on and although omicron will capture the hearts and imaginations and column inches of the world and the financial market this week, there is other stuff happening. China releases official PMIs tomorrow and Caixin Manufacturing PMI on Wednesday, and Services PMI on Friday. Wednesday the 1st also sees the usual dump of PMIs for the rest of Asia and Europe, which also sees Eurozone Inflation and pan-Europe Retail Sales on Friday. South Korean Industrial Production and Retail Sale will generate some attention, as will Australian Retail Sales and Balance of Trade.

Believe it or not, this week is also a US Non-Farm Payroll week, usually the one ring to rule them all. The street is pricing in another 500K+ jump in jobs although its impact is totally reliant on the evolution of the omicron situation. If that has faded and payrolls are strong, we will be back to the Fed taper-trade. If it hasn’t, then it will be ignored no matter what the headline number is, as the street prices in central banks everywhere, including the Fed, breaking the glass, and hitting the big red “WIMP” button.

Speaking of central bankers, we have a plethora of them speaking tonight in the early hours before Asia. The ECB’s Christine Lagarde and the Federal Reserve’s Jerome Powell and the Reserve Bank of Australia’s Debelle all speak. We have a rent-a-crowd of Fed Governors, Clarida, Williams and Bowman also making speeches. We already know what the only question will be to all of them. Expect to hear lots of x central bank stands ready if needed, we have lots of tools available, monetary policy remains flexible, insert we’ll loosen policy at the first sign of trouble comment without specifically saying it here. That might be good for stocks, commodities, and bonds if you are brave.

A mixed start for Asian stock markets.

US futures markets and Asian stock markets have diverged sharply today, with US index futures rallying after the bonfire of Friday, while Asian markets have moved sharply lower once again early in the session. Part of Asia’s negatively could be a partial catch-up to the scale of the US and European rout, but also their slower pandemic recovery, the scars of delta, and a much higher beta to world trade and the global recovery.

Meanwhile, US index futures raced higher out of the gate this morning and have continued higher, likely grasping at the straw of reports that omicron’s symptoms are milder. S&P 500 futures are 1.10% higher, with Nasdaq futures jumping 1.40%, while Dow Jones futures have risen by 0.75%.

The halo effect of the US futures is starting to reverse the early losses suffered in Asian markets. The Nikkei 225 have reversed its entire early falls to be unchanged, with South Korea’s Kospi is down only 0.40%. Taipei has also recovered, down only 0.30% now. However, Singapore remains 0.90% lower, with Kuala Lumpur 0.25% and Jakarta 0.68% lower. Tourism-centric Bangkok will likely endure a tough start to the day. Australian markets have staged a sharp about-face this morning after a very negative start, both the ASX 200 and All Ordinaries rallying back to be down just 0.10% for the session.

China markets are mixed with casino stocks in Hong Kong sharply lower as China’s clampdowns extend to that sector. Technology stocks have rallied strongly though leaving the Hang Seng down just 0.20%. In Mainland China, the Shanghai Composite is down 0.30% with the CSI 300 easing by 0.25%.

Given the price action seen in Asia today, led by the US futures rally, European stocks are poised to jump higher this afternoon if the US futures rally is sustained. Having been stretchered off with serious injuries on Friday, as Europe faced a double whammy of omicron and its 4th virus wave, European markets, theoretically, have the most to gain if the price action in oil this morning, for example, is anything to go by.

I would add a large note of caution however for equities in general. Despite the irresistible pull of buying-the-dip on tenuous early information on omicron, we have just one negative omicron headline away from going back to where we started. Expect plenty of headline-driven whipsaw price action this week.

The US Dollar stages a post-Friday recovery.

In a rather surprising move for the author, the US Dollar suffered heavily on Friday, the dollar index falling by 0.74% to 96.07 as haven currencies like the Swiss Franc and Japanese Yen staged powerful rallies. EUR/USD rallied as well, perhaps because so much bad news was priced into it, climbing 0.90% to 1.1310. The US Dollar suffered I believe, on cross margining selling, and that an omicron wave would bring the Fed’s taper to a shuddering halt, something with which I agree with, as US yields fell sharply at the long end of the curve.

This morning, the rally in US equity futures and oil has lessened those fears, with US yields also firming. That has seen the dollar index rally by 0.22% to 96.28, with the JPY, CHF and EUR falling by around 0.25%. USD/JPY fell by an impressive 1.70% to 113.40 on Friday, testing 113.00 intraday. From a technical perspective, USD/JPY should start to form a bottom around 113.50 and EUR/USD will likely struggle to make much progress above 1.1300 unless US bond yields dramatically fall from here.

Currency markets are also sending out a few subtle signs that risk sentiment remains highly elevated, with Asian currencies falling aggressively on Friday, but making back only very modest gains today. Notably, USD/KRW is unchanged at 1193.50 today, and USD/CNY is barely changed at 6.3860. USD/THB, meanwhile, has actually risen 0.70% to 33.740 and USD/MYR is unchanged at 4.2380. Another warning sign comes from USD/TRY which is also unchanged, although the Mexican Peso and South African Rand, cremated on Friday, have risen 1.0% on thin volumes. The Australian and New Zealand Dollars fell 1.0% to test 2021 lows at 0.7100 and 0.6800 on Friday, but the sentiment indicators have only recovered by 0.25% this morning.

So, in the EM and commodity space, currency markets are adopting a much more cautious tone, suggesting the overall market remains very much on edge. Like equities, a negative omicron headline or two is likely to see the sell-off resume in earnest, which should benefit the Yen and Franc once again. Markets will be very much set up for a binary outcome this week based on omicron headlines, subsuming even the US Non-Farm Payrolls results. Positive news, buy everything, sell havens. Negative news, sell everything, buy havens, watch the whipsaw, and rinse repeat. Volatility will be the winner.

Oil stages an impressive recovery after Friday’s bonfire.

Oil will be the market where short volatility traders go to die this week. The omicron whipsaw is on full display today as Brent and WTI, having fallen by over 9.0% on Friday, have staged a very sharp rally in Asia. Brent crude has risen by 4.78% to $76.35 a barrel, and WTI has rallied by a mighty 5.45% to $71.85 a barrel, thanks to some tenuous reports that omicron’s symptoms are mild. Time will tell if this is correct (and I hope it is), but financial markets aren’t waiting around to find out.

The picture for oil is further muddied by the OPEC+ JMMC meeting and full meeting this week, the latter occurring on Friday. Negotiations with Iran restart in Vienna today as well over their nuclear programme. The prospect of Iranian crude increasing on international markets, another potential volatility point. Add all that in with virus developments and whipsaw price action this week in oil, is more likely to be chainsaw action.

OPEC+ compliance has held steady above 100% for quite some time now, suggesting there is not much swing production available to open the pumps anyway. I also note that pre-omicron, US production had recovered to 11.5 million bpd, yet prices were still high. That would suggest OPEC+ would have been comfortable raising production targets as planned, even if they couldn’t actually pump it.

However, OPEC+ has also repeatedly noted that a resurgent virus is one reason why they have been cautious about lifting production. OPEC+ has also forecast markets moving to a global daily surplus in early 2022. Taken with increasing US production, SPR releases, and now a potential omicron roadblock to the global recovery, OPEC+ probably has all the excuses it needs to hit the pause button on increasing production in December and awaiting further virus clarity. Friday’s capitulation will have cemented that thinking.

Either way you cut it, I can’t help but feel that Friday’s lows were probably the bargain of the year if you were an oil buyer, speculative or physical. Technical indicators are pretty useless in markets like this, but I note that the RSIs on both contracts are close to oversold, and that both Brent crude its 200-day moving average (DMA) on Friday at $72.70, while WTI has regained its 200-DMA at $70.00 a barrel this morning.

Gold, the forgotten haven.

Friday should have been gold’s safe-haven day in the sun, and for a short time it wise, rising $23.0 an ounce to $1815.50 at one stage. However, but the sessions end, gold had slumped back to a $1793.00 close, a minuscule gain. Like bitcoin, gold suffered over the course of Friday even as US yields and the greenback sank. One reason is likely the very poor performance of platinum and palladium on Friday, the other is likely to be cross-margining stop-outs with investors liquidating gold positions to cover losses in equities for instance.

A general recovery by platinum group metals, industrial metals and cryptos today has failed to flow into gold strength, perhaps because US yields and the US Dollar are higher. Whatever the underlying dynamics, the price action is negative, gold rising just 0.10% to $1794.80 this morning, with the recovery rally leaving it behind. That suggests that the downside is the path of least resistance for gold, and it is a sell on rallies this week.

Gold will have resistance at $1800.00 and $1815.00 to start the week, with the post open spike to $1770.00 an ounce this morning, a dubious move even by Monday Asia futures open standards, will provide initial support. In between, gold may find some friends around $1780.00. Failure of $1770.00 signals a retest of $1760.00 and $1740.00 an ounce.

Bitcoin

The weekend worries unwound all of bitcoin's 7.0% loss on Friday, as the power of buy-the-dip dangles an irresistible lure. Bitcoin is trading $57.330.00 in Asia, barely changed from the weekend session and has quite a solid line of resistance just above here at around $58,500.00 of fiat US currency. A rise through $58,500.00 signals a return to 60,000.00 in the first instance.

Bitcoin has successfully held its 100-DMA, today at $54,210.00 for three sessions in a row. My bearish radar won’t shout target acquired until we see a daily close well below that level. But if we do, a move below $50,000.00 is possible.