Stocks Rally As Omicron Fears Abate

All right, very good morning, Tuesday, 7th of December. Hope you are doing well, and let's get straight to it and up to speed of what's going on in what is a generally risk-on morning for the European session to get things underway. Equity index futures seen quite a bit higher. The DAX already up 200 points, the NASDAQ future up a similar margin. Comes after a higher close on Wall Street last night. The S&P finished up 1.2%, Dow 1.9%, Nasdaq 1— or 0.9%. And the general theme here has been the increasing perception that Omicron concerns are abating to a certain degree, albeit we remain vigilant. And that's led then, and been quite transparent in some of the sector plays on an equity breakdown yesterday. So some of the airline stocks rallying, we We saw the same in the overnight session in Australia. Qantas, Australia's flag carrier, gained as much as 5% overnight. Travel groups Flight Centre and Corporate Travel Management in Australia both rose more by more than 6% on the basis then that the new variant might be less severe than feared. And so equity index futures, as I said, moving higher this morning. If I was looking at the Nasdaq, quite interestingly now we've basically taken back the entire sell-off that was seen at the end of last week on the Friday. And you can see here we're just testing up a relative point of technical relevance in short-term price action here, which is around the 16,066 level. You see that previous low that we printed back towards the end of November, which we've retested and held back on the 2nd of this month, and then also on Friday. So Thursday and Friday is kind of double top is where we're trading at the moment, which resides just below the R2 on the charts. So yeah, a decent kind of risk-on morning. Crude oil has followed suit, and WTI crude already this morning trading up around $1.30 at the moment. And you can see here, continue to move higher through late US trade and then continue to move higher as well in the Asia-Pac session. We'll get to some of the other highlights as well from Asia, which has further fueled some of this risk-on movement. Um, from a daily continuation chart, I think it always helps to have a bit of perspective. And you can see here, from the initial Omicron variant being identified in South Africa— so this was going back to the 26th of November when oil prices collapsed down to the low that we printed back on Thursday— you can see we've now retraced probably more than a third of that move, having reclaimed and bounced back above, say, $70 a handle. So it gives you a bit of context of where we'd need to get to. We're obviously still about $7 short of a full recovery from discounting some of the Omicron risk. I'd say it's probably unlikely to get there very quickly because there's still obviously a few data points that we need to see to come in to kind of ratify that idea and notion that the market is starting to price in a kind of decreasing risks associating to the lethality perhaps of the Omicron variant. Um, on that point though, let's flip over to Asia and get straight to the headlines. Before I begin, if you're watching this on YouTube, really appreciate it if you could like and subscribe to the channel if you're not already part of the community. Would love to have you on board. But straight to it, and the MSCI gauge of Asia-Pac indices in the overnight session actually is on track for its biggest gain in more than 3 months overnight. Hong Kong stocks in particular advanced with Alibaba, as you can see here from some of the headlines, have had a bit of a management shakeup. It was their chief financial officer that left and their shares responded very meaningfully to the upside. I think the move was around 10% or so. And in fact, the Nasdaq Golden Dragon China Index, which is basically like China-exposed firms listed in the US, was actually up around 3% and that snapped a 6-day losing streak. A reminder, of course, yesterday we saw an unscheduled announcement, albeit not completely unexpected because they had been hinting this for a while, which was the PBOC signaled easing of real estate curbs and pledged to stabilize the economy. They of course came out and cut the reserve requirement ratio, the RRR, and they also said that there's room for a variety of monetary policy tools. So part of this movement as well, definitely being supported by that, and that was very evident in the Asia-Pac session, taking the positive handover and baton from the higher close that we had on Wall Street. Not only that, we've also had some data overnight, Chinese trade data. Chinese exports grew faster than expected in November, um, record on external demand, of course, fairly seasonal ahead of year-end holidays, but also an easing power crunch domestically helping things. And Chinese exports came in, in dollar terms, year on year, third, um, sorry, not 30, 22% versus an expected 19%. So firmer than expected. So that was also assisting some of the, the general sentiment play. Um, rounding off the kind of Asia-Pac coverage, we had the RBA rate decision overnight. Nothing untoward really came of that. The Aussie is trading firmer at the moment, but generally in turn with the pivot we've seen back with commodity price rises, with the abating fears over Omicron And they left their rates in Kiwi unchanged. They cited uncertainties from the new strain of the coronavirus while highlighting positive signs in the labor market and the broader economy. One thing though to mention, um, is the UK specifically, because we did hear, um, the UK Health Secretary— you can just about see his head there at the bottom— Sajid Javid. He confirmed community transmission of the new Omicron variant yesterday is occurring in England. Case rates at the moment of the new variant are very low, 336, but the idea is with community spread that that number is going to accelerate very quickly. Now, although it might be proven that lethality, i.e., mortality, is relatively low, the question mark will become then what sort of pressure does this put already on the hospital network or the NHS, and one of the things that we're seeing at the moment is The actual deaths within 28 days of positive test remain fairly static. Bear in mind though that we won't really see the impact on that side of things from Omicron variant for at least another 4 weeks or so. The ones then is about patients being admitted into hospital and healthcare, and actually that's also plateaued, but the case rate number is rising, and in fact it's already as of yesterday at 51,500. And that pretty much puts us up around where we were at the double top kind of peak of cases through the outbreak of really Delta variant, which we know was highly transmissible at the time. This one probably proving even more so. And so layering in on, on top of the starting point of where we're at with cases then leads to the idea then with community spreading that these case rates are going to go north from this point going forward, and we'll start to see that materialize probably as we go through into the Christmas-New Year period. Um, that being said then, what is this leading to? Well, it is leading to a bit of a reshaping of market expectations of when the Bank of England are going to hike rates. We know inflation is accelerating in the UK as it is elsewhere like the US and so on, and that definitely does lead to the narrative of tightening of policy sooner rather than later. However, this Omicron outbreak is still a bit of an unknown quantity at this point in time. Um, you can see here the forward interest rates in overnight index swap markets have seen the blue line from— just is basically interest rate expectations over a timeline forward-looking from today, the left-hand side, going further forward to April 2023. So you can see the shape of rate rises being priced in over time. And the blue line is what markets were pricing at the beginning of November. The pink line is what markets are pricing as of now. And you can see that that, that line has got more shallow, meaning then that market participants are getting a little less kind of bullish about the rate hiking cycle from the Bank of England. And actually liftoff, you can see, has started to be pushed out a little bit. So although there are still bets of a December rate hike, I think it's shortly after the Fed meeting on, on the 15th. So in fact, then the Fed meeting's next week, the BOE to follow straight after. It's very much on a knife edge whether or not they will pull the trigger. One thing we had yesterday was JP Morgan, they changed their BOE rate hike forecast to now February of 2022 from December, purely based on the unknowns around the Omicron variant. Now, why February? Well, just like the Fed have their quarterly summary of economic projections where they outline things like the dot plot and their economic forecasting for jobs, inflation, growth, and so on, Bank of England have the same. However, February would be when the monetary policy report comes out, so it's slightly on a different calendar timeframe. So February, May, August, and November is when those reports come out. So hence the rationale for that timeline. By February as well, you know, I guess you're probably going to have much more clarity on the inflation picture. That in itself is not expected to peak according to Bank of England commentary until April anyway. And then you're going to have much better, greater oversight of what exactly the situation is on the, on the variant at that point in time. So it makes some sense. The final comment on Omicron in the US: Fauci has been the health advisor in America, fairly upbeat, talking about Again, the degree of which then the negative impacts from a health perspective of the new variant are showing some optimism in this, in the fact that it's fairly weaker than what we were initially anticipating or what was being feared in markets. However, one thing that's happening in New York, as case rates have been rising quite quickly, is that the state now will require all private sector workers well, this is talking about New York City specifically to be vaccinated against COVID-19. And this obviously would be a bit of a shift to be the, the most strictest vaccine mandate to be imposed anywhere in the US. So something to just bear in mind. All right, moving off that and talking about some single stock news. Tesla, you might have seen yesterday Tesla shares, they momentarily traded below $1,000. and that came after kind of a string really of, of quite negative news that we've had for Tesla of late. I'm just going to see if I can get the chart over. So this is looking at Tesla's stock price, and you can see here we peaked up during that kind of peak EV frenzy almost that we had, which was really this era here in November where we ran up to $1,250 on that, that kind of relentless march higher that saw their market cap just rise by an incredible margin. Um, not much of a surprise then, Elon Musk kind of cashing out when the shares were, were up at around the $1,200 kind of level, and he's been scaling out trying to accumulate that 10% exit. But the shares have come off, and actually from high to low in this period here, you are talking about almost 25%. The stock price did drop through $1,000 yesterday, and, and that's quite a meaningful price point, as you can see. However, it has really yet to really hold that breach at this point in time. As I said yesterday, we closed pretty much at the margin on that level. So what exactly is going on with Tesla? Well, a few different things. Yesterday, the SEC opened up an investigation associated with solar panel system defects. Now, this isn't actually a new, um, case being brought forward, but it's the first time the SEC is, is being involved. I think it dates back to actually 2019. Separately, federal safety probe is ongoing into accidents invol— um, involving, um, its driver assistant systems. Uh, and now Tesla, according to this latest report that came out after market yesterday, they're replacing faulty Autopilot cameras in some cars according to internal documents. You know, one of the other things I was also looking out for and talking to a couple of people yesterday was, as we have— we actually had any update about that $4.2 billion, 100,000-car Hertz deal? And as far as the analysts I was talking to said, there's been no confirmation that that actually is being inked as a deal. And so despite all the hype that we had for Tesla I think it was somewhat inevitable that the shares were going to come off. Um, companies, EV pure plays like Lucid, for example, were down as much as 19% yesterday. They did bounce a little bit. Um, they didn't close, uh, as negative as that. I think they were down about 5%, but I think a little bit of a return back to normality for some of these EV stocks was, was probably going to happen at some point, and it's probably a healthy thing more broadly speaking, for these stocks going forward. You know, an interesting statistic, if you don't listen to our podcast, that Piers and I were talking about a few weeks ago when EVs were really blowing up, was the fact that if you go back to the early part of the 20th century when mass manufacturing of automobiles really started to kick off, as much as there were Ford and other automakers, there was actually 250 250 startup auto manufacturers in the US in the beginning of the 20th century. By the end of the 20th century, there was only 3 left: Ford Motor, you know, today General Motors, and Chrysler. The other 247 all blew up or got amalgamated into those 3. So in the end, there are going to be winners and losers. I'm certainly not calling that on, on Tesla, but when you've got Rivian, You've got Lucid. As much as each of them have their own individual kind of case studies, like the Rivian association with Amazon, for example, there's going to be lots of EV pure plays, I'm sure, that come and some that go. But yeah, in terms of short-term price action, there's been quite a lot of mounting negative press, let's say, for Tesla. It's created some of the recent movements. One thing is the drop below to $950 that we saw yesterday in Tesla shares actually saw their market cap briefly come back below that trillion level, bearing in mind it was up at $1.25 trillion only a few weeks ago. So incredibly volatile for a stock of, of that magnitude. All right, other stories of note. Um, the US and European allies are weighing sanctions against Russia's biggest banks and the country's ability to convert rubles for dollars and other foreign currencies should Putin invade Ukraine. That's been according to people familiar with the matter. And of course, this is in the spotlight at the moment because US President Biden is going to be having conversations with Vladimir Putin at 3 PM later on today. Uh, the US could also restrict the ability of investors to buy Russian debt on the secondary market is also being talked about as well. Now, the Russian leader has made clear he's willing to invade Ukraine to protect what he sees as vital national security interests. And he's also shown a willingness to tamper with energy markets by, of course, the high degree of dependency that much of the mainland Europe has on gas coming from, from Russia. So he has that kind of string to pull to really leverage down on some of the negotiations that are happening. A senior Biden administration official speaking to reporters yesterday made clear that the US does not want to commit its troops to Ukraine in the event of a Russian invasion. So this is the other delicate matter, of course, that Biden has to tread, and hence the reason why it's more about targeted sanctions than any type of military intervention or support in that matter, because Biden wouldn't want to do that. That's going to be of no use for him, most likely at the ballot for the midterms coming up next year, when the more bigger payoff for him politically will be much more on domestic-focused issues rather than foreign affairs to that degree. So that's what he's going to have to manage. Then the final articles of the day, um, quite interesting one out of the FT. Policymakers at the ECB, they've said, are said to be reassessing the extent of their commitment to extra stimulus. Recent events have led to doubts among Governing Council members, which has been forecasting for months that inflation will fall back below its target and justify the continuation of stimulus. A policymaker added that they would be, they would be very comfortable committing to anything beyond Q2. So yeah, there's just a lot of doubts again around the, the new variant and whether or not then this is going to cause more inflationary issues down the line and how best is is it for the ECB in order to act? Um, the debate inside the central bank reflecting the question then over how quickly inflation will fall, as the new variant could well stoke price rises in similar fashion to what we've seen before and the effects that we've had through the summer. All right, in terms of the scheduling for today, we've already had bulk of things come out already this morning. In terms of the German data at 7 o'clock. Uh, just to give you the update on that figure, the German industrial output came in at 2.8%, um, was quite a bit firmer than expected, 0.8%. Uh, if you're a homeowner in the UK and you're slightly, um, nervous about a potential correction in UK house prices, fear not. The latest UK Halifax house price number actually came in slightly higher than expected for November at 1%. So it continues to plow on at record levels. And then for the rest of today, it's pretty quiet on the docket. You've got German ZEW, which of course will be watched quite closely for European traders this morning at 10 AM. But otherwise, yeah, it's pretty quiet. You've got the API inventories after market, fixed income supply UK, Germany, and $54 billion of 3-year note auction out of the States at 6 PM later this evening. All right, but that is it. Um, again, if you're not already subscribed to the channel and you've watched this to the end, thank you, and remember to hit that button, and I'll see you same time tomorrow. All right, take care.