The Week In Markets: 6th - 10th December 2021 (Omicron & US CPI focus)

Okay, it is Sunday the 5th of December. Hope you had a fantastic weekend and going to get you up to speed for the week ahead. Going to talk about updates on Omicron, uh, 3 key things to look out for going forward, some updates on restrictions, and also an update on the US COVID situation. Don't hear much on that at the moment in terms of UK British press, but certainly worth taking a look at those numbers. And it's mainly Delta actually other than Omicron at this point in time, but I'll get you up to speed. Also going to talk a little bit about oil news. Saudi changed some prices over the weekend on the selling of their crude to different customers. We've got updates on the tensions between US and Russia as well as China. Evergrande, the kind of embattled property developer, is going to go into restructuring talks, and we'll talk about that in a bit more detail. Then for the week ahead, all eyes will be on the US CPI number, but that's not going to come until the end of the week. But of course, it's going to take renewed emphasis given the fact that we've had a 3-decade high in US inflation, obviously tracking north now of 6%. Expectations are for the year-on-year number to go to 6.7% later on this week. And of course, this comes after Jerome Powell, the Fed chair, dropped that phrasing of transitory last week in his Senate hearing. So that's what's on the agenda. And before I talk about these charts, which is updates on South Africa and Omicron, Quick look at how things are standing. Obviously markets are closed, electronic trade will reopen shortly. The weekend trade would be indicative of just a slightly lower open for Wall Street, but fairly insignificant. The Dow seen down about 0.1% ahead of the open. So at the moment, you know, for the week as a whole, from a sentiment perspective, certainly any updates on Omicron will be particularly key. As I mentioned, there are a few other things of course to look out for. Like not just the US CPI, you've got the RBA meeting, you've got Chinese trade data, you've got Chinese inflationary metrics coming out, you've got, um, the RBA, you've got their rate decision as well. So a few other things, but overall I'd say largely dictated still by, from an asset class perspective, for the next 5 trading days, what happens with more information that comes out on Omicron. And the reason for that is it's likely to dictate or not the perception of whether the Fed are going to go ahead and accelerate tapering when they meet, which is on the 14th and the 15th of December. And that meeting obviously not far off now. Given what Powell has said and his reappointment and so on, it's obviously accelerated the idea that they are going to move in that direction. They've certainly hinted at that with a lot of hawkish commentary of late. The inflation data as well likely to support that. But really how Omicron develops over the next week or two will be really key to determining really the expectations around around that, and then subsequently how asset classes are likely to react as that information starts to come in. So from a currency perspective, the one thing that certainly renewed fears of a new coronavirus has meant is just generally a bit of flight to quality, nervousness in equity markets globally, the VIX trading at some of its highest levels in the year, and consequently tend to get a bit of a move to safety and supportive of the dollar in that respect. Respect. In this case, cable just been respecting this trend line going back to the 19th of November. You can see multiple tests including that of last week and still holding up. So I'd probably keep that still on your charts going forward. And then of course looking for the greenback to really dictate proceedings. We do have in sterling UK GDP coming out later on in the week. That will as well be on Friday. And actually, the UK economy may have rebounded in October to levels not seen since before COVID-19. So some of that momentum, that positive read across in UK growth, said to have come from kind of the momentum ahead of the Christmas holiday. And so economists polled by Reuters expect the economy to have grown 0.5% between September and October. And one thing to bear in mind though is that as kind of optimistic as that does sound, or as positive, don't forget though that the Omicron coronavirus variant started to emerge late November. So as much as, you know, GDP might sound good on the top level, remember markets today are trading tomorrow's kind of future, and so backward-looking GDP I don't really think is going to have too much of a bearing, to be quite honest. When it comes to even very hawkish pricing for the Bank of England, a lot of this will be down to the Omicron variant and any subsequent reactions that get taken by the government in regards to restrictions, which obviously could have a distinct impact on the UK economy will probably be heavy kind of weighted factors for that BoE decision-making on rates. The euro is pretty similar overall in terms of the way it's been shaping up of late. So quite a large degree of volatility of late, particularly given some of the hawkish turn by the Fed, which has really seen then the fact that Europe has already been under a lot of pressure, of course, with Delta COVID conditions, never mind the new variant coming into play at the moment. And as such, then, in the contrast of a fairly, at least at this point, healthy US recovery ongoing with higher prices as well in the US, just leading to this idea of a more hawkish pivot from the Fed. And that's what's led to that downward movement. Bit of a floor found and a nice technical point around 112, which was that previous area of support back in the summer of 2020. We recovered a little bit. And you can see we're kind of respecting somewhat the same price range of $12 to $14 as what we did in this period here in the summer of 2020. And we're just fleshing that out again here more recently, and we're sitting mid-table at $113 at the moment. So those two key levels either side, quite key. And obviously the dollar likely to really dictate whether or not we break that upper or lower bound. Um, In terms of elsewhere in the global equity markets, you can see a bit of selling pressure here in the S&P and NASDAQ came in for a bit of a weaker finish to the week. But one thing is that both the NASDAQ and the S&P did actually close above their 50 DMAs yesterday despite, well, the S&P future pretty much at the 50 DMA. The NASDAQ actually went through it and then closed above it. So still keeping an eye on that at the moment. You can see this level just under 4,500, 4,492 in the S&P was the kind of double bottom from last week, previous area of resistance as well through the what were prior all-time highs back in late August and retested that in mid-September. So any further breakdown of that, be keeping an eye on these previous levels here, 4432.5. And then as we scale down much deeper, if we were to see a more worsening Omicron development, then perhaps then a bit more of a deeper move down to 42.52 is worth, um, just marking up as well. All right, we'll bring up oil when we get to talk about the Saudi, but let's just delve into some of the news before we come back to the charts. So let's talk about Omicron. This were a couple of charts here that I shared on my Twitter account, which you can access here, over the weekend. They came out of the FT, and obviously at this point in time it's still very early to draw too many conclusions. Other than anecdotal kind of evidence. Scientific numbers will start to come through in the coming days and weeks. Um, 3 things that Piers and I— Piers, the head of trading at Amplify— talked about in our weekly podcast on Friday, and that was transmissibility, vaccine evasiveness, and lethality. Now it's these 3 key points which we talk about a lot more, so do check that out. Just search Amplify Me Market Maker on Apple or Spotify, you'll find it. But they're the 3 key things. Now, transmissibility is what we're looking at here. So, you know, one of the things that the market's leaning on the most is the area of which is showing the most cases, and so they can start to draw out early signs of trends, for example. And here, Omicron variant is driving a steep new wave of cases in South Africa. And here you can see the previous ones, Delta alpha and beta, and you can see the latest daily figure that we've had in, in South Africa is way up here. So it's, it's increasing at a pace that we haven't yet seen before, albeit it's the very, very early signs of these cases emerging. Now research from South Africa shows people are more likely to be reinfected with the Omicron variant than others before it, and so this goes to point 2, which is then talking about immune evasion. And then we start to move on and talk about then COVID cases and hospital admissions arriving faster than previous waves in South Africa. And this is one of the Tishwane— I'm sure I'm saying that incorrectly— but Tishwane District. And the reason why they've chosen that is because that's one of the areas which has the highest amount of cases being reported, and that's where Omicron is most prevalent. And so what you can see here again is cases and subsequent then hospitalizations are all happening at a much steeper, faster accelerated pace than what we've seen in any of the other previous waves, which is obviously none of this is kind of good signs at this point in time. Now in terms of lethality, it's probably too early to tell. Most of the research that I've read and listened to talks about this idea of more looking at a timeline of 4 to 5 weeks before we can really determine that type of thing in terms of mortality rates connected to this latest variant. But again, if you want to just understand then what is it, the key mutations, and, and how is this particular variant different, this is a good graphic that you can check out on the, on my Twitter account, as I said. Um, what is this leading to? Well, a couple of different things, starting off with the likes of Europe, where as of Monday in Italy a green pass, which is proof of vaccination, recovery, or recent negative test, is going to be required on transportation services. So things like the metro, buses, local trains, hotels, and so on. Now, this isn't particularly new. This was part of their roadmap plan that Draghi put out before. It's just the fact that it's going to start on Monday, so it's worth being aware in case you hear of more stringent measures being adopted in Italy. Um, it all is also worth noting that of all the European countries Um, only 12.3% of Italians over 12, so 6.6 million people if you think about it from population, um, terms, haven't been inoculated. And shots for kids aged 5 to 11 is due to start later this month after vaccines by Pfizer and BioNTech received approval by the Italian drug agency. So actually, when you think about it, Italy have Nearly 90% or so of people in the country have been inoculated, and I'll get back to why that's an important figure in a moment. The other country then is Germany, and I'm going to flip over to here. This is a website called Our World in Data. It's a website that gets often used by a lot of bank research, and it's basically an aggregator of different data sources. So in this case, it's looking at the Oxford University Government Response Tracker, and it takes in, in, in different intel from different university tracking systems. And it's looking at stringency index. And that basically is a composite measurement of 9 response indicators, including school closures, workplace closures, things like travel bans, so on and so forth. And so we can see then on a relative scale, how stringent are these restrictions, and obviously, the more stringent they are, typically the more economic impact that it's going to have in that more localized region. And so one of the ones you can see here is Germany, of course. Their government last week on Thursday ramped up its response to the latest outbreak. They had been seeing one of the fastest rates of cases rising in mainland Europe, and they've put restrictions on the unvaccinated and are weighing compulsory shots. Austria has already proposed mandatory vaccinations, while other countries plan to fine those who, who refuse. So you can see here Italy, Greece, and Germany probably most stringent, then followed by Spain— sorry, France— slightly looser in Spain and the UK and Ireland at this point in time. But obviously this is a moving target at this point. And then I mentioned briefly the US. You have had Anthony Fauci talk over the weekend, and he's one of the main medical officers in the US and advisors. And he's basically said the US is reviewing travel restrictions on a daily basis. I think it's 8, maybe, Southern African nations that they banned at this point in time. To give you an idea though of where the, the lay of the land, if you like, in America, this is looking in United States and this is new reported cases on a 7-day average. You've got hospitalizations and deaths seen down here on the bottom side and you can see here we started to see a little bit of an acceleration, more rapidly now, more steeper, um, through the course of the last week compared to the commencement of rising of cases, which really started about 4 weeks ago. So this started to pick up at this point in time. If you look at it from a geographic point of view, I think if I scroll down, you can see it on a bit of a relative heat map of average cases per 100,000 people in the past week in the States. And many northern states continue to struggle. New Hampshire, Michigan, Minnesota lead the country in recent cases per capita. Uh, more than 55,000 coronavirus patients are hospitalized nationwide. For context, that's far fewer than in September but is an increase of around 15% in the last 2 weeks. So definitely it's heading in the wrong direction at this point in time. The current outbreak continues to be driven At this point, this is not a map and it's Omicron gone crazy. This is Delta that's really causing this spread at the moment in America. But one thing obviously that's something to be monitored and very vigilant about is the fact that now the Omicron variant has been identified in 16, at least 16 states at this point in time. If you remember a week ago, there was none. The likelihood is that figure of 16 is going to head north. That's not that unexpected. The difference here, the reason why I said remember that figure of nearly 90% of people in Italy being inoculated, in America, in the US, that figure is only at 60%. If you think about countries like Portugal as well, I think they're up at 90%, and so a lot of mainland European countries, they're being very forceful with restrictions, they've got highly vaccinated populations, they're going to be rolling out booster shots, whereas in America you've kind of got the opposite. You've got a quite a fractured kind of system whereby restrictions are really dependent on a state, federal level rather than a national-led policy. You've got a relatively low number of people inoculated at this point in time. And then you have the, the other added complexity of the fact that America is a very expansive country. The north, the south, the west, all very different in terms of their temperature and conditions, and that has impacted, as we've seen before, the timings of subsequent outbreaks. And then of course, you know, we are heading into that period around Christmas and New Year's, which we tend to see just general case rates go up naturally, just given to general weather, but also the congregation of people in the holiday season as well. So Yeah, definitely Omicron's not coming at a particularly good time, but you know, these are things that I'm looking at that I'm very conscious of monitoring to try and gauge how impactful or not. Can we dismiss Omicron, or is it something we should be actually starting to get more serious in, you know, thinking of protection against these types of, um, in terms of your portfolio or your strategies to protect against perhaps a worsening of this situation to a degree that starts to have a real impact, importantly for markets, on policy timing for the Fed ultimately. So things like an acceleration in tapering, you know, do they start to pull that back? Probably now markets are thinking they'll double up from $15 to $30 billion come Jan. Do they push that back to just see how this plays out? Because likelihood is that a lot of those patterns we've been seeing— this isn't just unique to the US, but it's probably going to happen as well As you can see here, these numbers are going to go up into the next period of 4 to 6 weeks, one would imagine. All right, let's move off and talk about something else. Saudi Arabia. So following on from the OPEC meeting that we had last week, of course, where against market expectations they didn't hold, they pushed ahead, said they're going to increase production by 400,000 barrels a day from January. Much to the kind of pleasure of the US administration, who sent their high-level delegation in talks with Saudi Arabia. Who knows what they promised, but perhaps one of the things was that Saudi could hike their prices. Much of the Saudi crude doesn't really go to the US, it goes to actually Asian customers. But nonetheless, what can we expect from oil at the moment? And let's just have a look at that chart. And yeah, oil prices have had a real big pullback, obviously, on the initial development that we've seen. The first day that new COVID variant was identified in South Africa was the day that oil got really hit hard. The initial move now that we've had over this latest kind of pivot from the multi-year high that we were trading only around a month ago or so Um, if I'm just going to bring up here, we've, we've declined from high to low approximately 27%. We did rebound last week. I mean, we came off the lows on the 2nd, so on Thursday and Friday we briefly made an 11% recovery. We actually closed with about a 6% bounce off the weekly low. Um, and so yeah, definitely still to be watched. And much like the perception for the dollar equities, oil is the same. Again, we go back to Omicron, you know, because regardless of really CPI being super hot, let's say we get a 7% reading, which would be around the top end of analysts on the street are thinking, as much as that you think would accelerate the timing over the Fed, increased yields, dollar, and so on, that has to come in combination with a fairly kind of neutral Omicron situation. If Omicron information starts to come out with real scientific evidence of it being not just transmissibility being high, but its mortality potential being high, there's nothing that the Fed can really do under that situation, or it's going to be a tough call. And so there's going to be that, you know, it's not quite a shoo-in that it's just going to be down to the fact that we can discount this at the moment. So there's a lot in play at the moment. And ultimately, I think a lot does come down to the variant and its developments. Um, elsewhere you've had geopolitics. You probably read this at the weekend. If you didn't, the latest being that Vladimir Putin and US President Joe Biden— let me just flip over— they're going to be having a telephone call on Tuesday, and it comes amid mounting military tensions on the border between Russia and Ukraine. Washington have warned that Moscow could launch an invasion in early 2022 with an estimated 175,000 troops. And if you just want to check out the graphics where it talks about this in a little bit more detail, it's always quite healthy if you haven't lived through the annexation of Crimea that we had a few years ago to get the lay of the land geographically of, of Moscow and Russia and Ukraine, Donetsk Luhansk, and so on. There's a good map here that I shared again on Twitter if you want to have a look at it. How much is this important for markets? To be honest, I don't really think that much. Probably for the ruble it will be important, as much as for the Turkish lira what Erdoğan says is important. As far as global markets are concerned, I don't think it's that big a deal at this point in time, certainly not in the context of some of the other things we've been talking about, like Omicron and inflation. The final thing is just a quick word because, you know, we were talking about this a lot a few months ago. It's gone pretty quiet, and really it's yesterday's news, I would say, and I really don't see it as a factor for this week. But the latest update here is that according to an exchange filing late on Friday, the company China Evergrande is going to actively engage with offshore creditors over a restructuring plan. This might come in the news. It has done in Bloomberg, as you can see here. But tomorrow, Monday, a 30-day grace period ends on $2 bond interest payments. They were initially due for the 6th of November. They've been, they've been kind of paying these at the very last minute on the rollovers, but inevitable that I think some sort of restructuring deal will start to take place. And the kind of risk factor with this, I think, has fallen away at this point in time. Looking at the week ahead. So as I said, the real— let me just scroll back up to the weekly calendar. Yeah, Monday's super quiet. Let's just go through this in chronological order. Then you've got the RBA meeting happening going through Monday into Tuesday, London time, that is. They're expected to maintain their cash rate at 0.1% and their bond purchases at $4 billion Aussie per week. Through to mid-February of 2022, while the RBA is also likely to stick to its guidance, which it just tweaked at the last meeting, to suggest that conditions for a hike are likely to take some time. That was against the previous statement or reference of no hikes until 2024 at the earliest. So yeah, there's a little bit of alteration at the last meeting, takes the heat off really doing anything too much at this this particular juncture for the RBA. So expecting them to stay on pat. As we go further forward, then we potentially have some scheduled Chinese data. It's yet to be confirmed, so I'll keep you posted on that as we go through the week. Then going further forward, you've got the Bank of Canada interest rate decision that will come out on Wednesday. Not expecting any policy changes there either after policymakers decided to end their QE in October and brought forward, forward in guidance for the timing of their first rate hike to mid-2022, last, last time we heard from them. Then going from Wednesday into Thursday morning, you've got the latest CPI reading coming out of China. Both Chinese consumer and factory gate prices then year-on-year expected to have increased but at a slower pace in November. CPI expected at 1.4%. PPI at 12.4%. And then going into Friday, we've already talked about the UK GDP that will be coming out, and this is the main real focal point of the week from a data perspective, is US CPI. Um, and so following on from Fed Chair's comments, as I said, where he dropped transitory, a lot of attention will be paid on this, particularly because it's one of the final pieces of the jigsaw puzzle we'll get before the Fed go into their deliberations for the mid- Dec and final FOMC meeting of the year. And if we're going off what Powell said last week, then they're pretty much set to speed up taper. And so this inflation data will likely support that narrative. Really, it's only Omicron that can stand in the way. And so that's really the two-factor thing that we're looking out for this week. Analysts at ING have said that they even expect that inflation year on year could go as high as 7% with a core reading closing in on 5%. That would be towards the top end of that type of range. But again, a lot of the market pricing will be dependent on that and the variant. All right, that is it. So hopefully that gets you up to speed for the week ahead. Any questions at all, feel free to just leave a comment on the video. Happy to help if I can. There's a full copy of my notes for this briefing available on my Twitter handle, or if you're in our Discord community via the Amplify Me hub, then you can check it out there as well. All right, take care and have a great week ahead. Thanks very much.