Risk Aversion On Growing Omicron Impact While Erdogan Props Up The Turkish Lira

Okay, very good morning to you. It is Tuesday, 21st of December. Hope you're doing well. I'm gonna delve straight into the news that matters for the day ahead. And even though there's quite a quiet calendar for this week in the run into Christmas, there's still quite a lot of news and subsequent market movement happening at the moment. And it's all really based around the continued emergence of Omicron on a global level and the potential that that can have for further restrictions into time. And so when we look at the close on Wall Street yesterday, the S&P was down about 1.1%, Dow 1.25%, the Nasdaq down a similar margin. And actually, for the S&P 500, it's the biggest 3-day drop that we've seen since September. However, one thing is, looking at the charts this morning, we have had a bit of a reversal really commence despite that weak handover from the close on Wall Street. Equity index futures going to European Open, trading quite firmly higher this morning. Oil's also seen a decent bounce since finding a bit of a floor from around 5 PM last night. So the ship has steadied after it got rocked a little bit by really two major things, not just Omicron, but the other thing of course that came out yesterday, well over the weekend, this continued resistance from the Virginia Senator Joe Manchin. And as you can see here, this is a picture of him. And yesterday, Joe Manchin's apparent no vote on the Build Back Better bill— Goldman Sachs downgraded its GDP forecast for the first quarter from 3% to 2%, second quarter trim from 3.5% to 3%, and third quarter from 3% to 2.75%. They said Manchin cited the country's existing debt levels, the re-emergence of COVID-19, rising prices for consumer goods. These were all his rationale for rejecting that bill. So at the moment, what we're seeing is economists are having to reevaluate then the kind of medium-term economic growth picture on the back of how impactful Omicron is likely to be on impeding economic activity, layering in an inability for this substantial bill to pass, or at least be delayed in the US. And that's what led to majority of the weaker sentiment yesterday. A couple of other things that are very interesting to update on the global, uh, Omicron situation. This was an interesting report I did share on my Twitter account if you want to read the full kind of piece, but this was looking at researchers at Imperial College London who basically compared just over 11,000 people with confirmed or likely Omicron infections with nearly 200,000 people infected with other variants. And so far, according to a report issued ahead of a peer review and updated yesterday, they see no evidence of Omicron having lower severity than Delta by either the proportion of people testing positive who report symptoms or by the proportion of cases seeking hospital care after infection. Of course, this would be kind of leaning on worst-case scenario given the highly transmissible qualities that this latest variant is showing if it is indeed then appears no less severe than Delta, that's going to be highly problematic going forward given the likelihood, as many officials are saying, that case rates probably in the UK are even in the hundreds of thousands at this point in time, irrespective of case rates numbers being factually reported around the 90k mark of the last few days. Um, other things then are what's happening in the US, and as you can see here, the Omicron variant accounted for 73% of all sequenced COVID-19 cases in the US surging from around 3% last week. It's gone from 3% to 73% in a week. These are according to latest federal, uh, estimates. Um, one thing I'd say on that point is, as dramatic as that headline sounds, there was, I would say, somewhat inevitability that this would happen. I would say the fact that it's gone from 3% to 73% is pretty rapid by any stretch, and, and so was adding fuel to the fire in some of yesterday's move and deterioration in sentiment that we were seeing. One thing to bear in mind though is that Moderna did say yesterday that a third dose of its vaccine increased antibody levels against the variant, and Pfizer-BioNTech have said lab studies show a third dose of the vaccine also helps neutralize Omicron. And what we're looking at here on this table is then the composition of the vaccine rollout that we've seen in the US. So very different to here in the UK, which is heavily built around the AstraZeneca drug. In America, it's pretty much exclusively Pfizer and Moderna. Moderna very less adopted elsewhere on a global level. You can see here proportionately, um, from percentages, roughly as a reference, you're looking at around 38% of all vaccines deployed in America are Moderna's ones. And some of those antibody level results from what a booster gives you in protection were quite encouraging yesterday. And Pfizer makes up around just shy of 60%. So actually, in actuality, this is quite positive things, but it's all dependent on then really having a successful booster rollout strategy in order to give people the relevant protection against— if it is proved to be as severe as Delta— the latest Omicron variant. So overall, I'd say just on this top-level situation, when you look at the charts this morning, as I said, things have started to recover. I think that yesterday, obviously, the negative kind of selling pressure in light of global indices as well as oil prices kind of came in as the market opened. And I think it's kind of just reacclimatizing to the realization of how impactful I think Omicron is going to be. But I think that that's kind of faded a little bit since that point in time. I think it was probably just somewhat exacerbated by kind of going into the run-in into Christmas, perhaps a touch slightly lower volumes and so forth. But overall, at the moment, this is a situation to be monitored obviously quite closely. But the ship has steadied somewhat. But it'll be interesting to see how we go throughout this session to see really where the, the lay of the land in terms of market sentiment is. The other thing, of course, is in the UK. And so, quick update, Boris Johnson, of course, yesterday— you probably would have read by now— held off introducing stricter UK coronavirus rules to clamp down on the new surge happening here in the UK. But he did leave open the prospect that they will be needed soon. And obviously he's been under increasing pressure. I just mentioned the Imperial College, they've typically always been quite bearish in terms of their assessment of how impactful the coronavirus is going to be. Sage though themselves have also been quite insistent on taking more strict protocols in order to contain the latest outbreak. Problem is, of course, politically Boris Johnson under multiple pressure points at the moment. Cabinet officials highly sensitive to the idea of further restrictions, and this has been shared by cabinet ministers, which are quite a large number, were satisfied, let's say, with the actions or muting of talking about doing further protocols going forward. To give you a bit of an idea of other factors as well in the UK, the number of Londoners hospitalized with coronavirus is rising sharply at this point in time, putting more pressure on the government, of course. And there were more than 1,800 people in hospital with the disease on Monday, an increase of a third in just a week, according to NHS England. This came yesterday in the context of a report leaked by the Daily Mirror which talked about the government may introduce new restrictions from December 27th, so just after Christmas. The restrictions being considered are step 2 of the country's earlier coronavirus response, which would include pubs, restaurants only being able to serve customers outdoors, a ban on indoor mixing between households, and a maximum of 6 people or 2 households being allowed to interact outdoors. My belief is that that will happen, and that will happen on the 27th. I actually think that that's— given the way that the coronavirus situation is developing at the moment, particularly in the UK, I think that is very much likely to happen politically. He's not really now got the timetable, uh, to be able to make any necessary changes or the political appetite within his own party to do anything now. But probably these numbers and the situation and the pressure certainly on the hospitalizations and NHS in the— in England is going to get materially worse between now until the 27th, requiring then I would say that that level of restrictions probably is going to come in. At this point in time. The cabinet, they are going to meet again this week. In fact, further dates on the severity of the new variant is expected on Wednesday, so we're still on the lookout for any further updates as we go through. But I'd be very surprised if anything more onerous comes in prior to Christmas. As I said, most likely on the 27th. The other thing, final story then, just focusing on the big things that are really moving at the moment, is the Turkish lira. You obviously would have seen this for quite a while, persistent weakness in the currency over the somewhat unorthodox approach of monetary policy that's being deployed by President Erdogan. Well, the lira at one point fell as much as 11% from Friday's close to touch 18.36 per dollar, its weakest level ever. I think when Eddie and I did a chat and a video we put out on YouTube a few, few weeks ago, it was trading around 12, and that was causing big big shock at the time. So it's now in excess of 18, or was yesterday, and that of course is the weakest level ever against the US dollar. And that followed weekend comments from the president indicating he wants to see rates go even lower. And this comes after he's been continuously cutting rates at kind of 100 basis point clips, irrespective of inflation surging at this present point in time. But new measures announced by the government yesterday helped put a floor under the currency, which proceeded to rally close to 47% from its intraday low to touch 12.28 per greenback, which you can see here. So this is the intervention that came in. This was when we were below or over 18, and then— because we're looking at liras per dollar here— and then the aggressive move up that we've seen. And we're tracking more back towards the 11 mark at this point in time. Um, so the currency actually ended the day yesterday about 24% stronger than Friday's close and did mark the biggest one-day gain since 1983. Um, the latest major shift, I guess if you're asking what was that, um, came after the government announced steps including the introduction of a new program to protect savings from fluctuations in the local currency. The government will make up for losses incurred by holders of lira deposits should the lira's declines against hard currencies exceed interest rates promised by the banks, Erdogan said, chairing a cabinet meeting in Ankara yesterday. The Turkish Bank Association head, to give you a bit of kind of context, said around $1 billion was sold in markets after Erdogan announced those new measures. So for the moment, yeah, intervention has taken place, probably somewhat inevitable, not uncommon. When you see it in EM markets to see this type of currency depreciation. However, intervention comes at a severe cost, and it's just going to be interesting to see then the subsequent direction of this price over the coming weeks. Obviously, if it continues to then reweaken and test these lower bound levels again, then how much firepower appetite does really Turkey have? For the moment, Erdoğan's being stubborn, he'll probably remain that way until the very last moment. And so those measures working for now. But I guess we've got to wait until really into the new year to see the dust settle and where the land lies at that point in time. Looking at the calendar for today, very quiet as is per the whole week. There's nothing really on the docket that really is going to raise your pulse rate at this point. You've got European consumer confidence at 3 PM this afternoon. API regular weekly inventories later on after market. And $20 billion in a 20-year bond auction from the US at 6 PM London time. But that's pretty much it. So with that, I'll leave it there. Wish you guys a good day ahead. See you same time tomorrow. Take care.