Fading concerns – Forex action

Stock markets surge as Omicron’s nervousness eases

Another day another directional move in the markets regardless of the latest omicron stock. Following yesterday’s news cues from South Africa that the new variant of Covid-19 may be symptom-milder than previous versions, the same message was reinforced by Dr Anthony Fauci of United States at night.

That was all the markets needed to really hear and the stock markets in Europe and the United States followed Asia’s lead and moved up the hill. Unsurprisingly, travel and leisure have led the way while technology has only increased modestly. Taken as a whole, the markets appear to be rapidly reverting to the Fed’s taper trade price hike. Value (boring old companies) outperformed growth (exciting tech companies), which makes sense as the US yield curve also steepened once again overnight. The theory being that technology and its ilk, with sky-high valuations, are more sensitive to upward movements in interest rates.

The US dollar and oil also recovered overnight, with markets resuming normal activity. And today, in Asia, the region breathes a sigh of relief with successful actions across the region. While I hope we’ve seen “omicron peak”, if that turns out not to be the case, I dread to think of the direction reversal we’ll see. As I said before, the winner in December will be volatility, not directional play. We remain at a negative omicron titer of plus of the first and minus of the last.

That’s not to say that nothing else is happening, and extinguishing the omicron fires has allowed other themes to come to the fore. Next week’s FOMC policy meeting will be a critical time, and the retreat of the omicron threat (allegedly) should allow the FOMC to announce a faster cut and possibly earlier rate hikes. If the US CPI shows 7.0% on Friday, this should be settled.

But next week is a veritable all-you-can-eat buffet of central bank decisions. Hungary, Chile, Indonesia, Switzerland, Norway, the European Government Debt Monetization Bank (ECB), Mexico, Russia and perhaps most excitingly, Turkey. This is not an exhaustive list, and the PBOC announces its LPRs the following week. After the announcement of the drop in RRR yesterday, the chances of a drop in LPR at least 1 year are increasing. Today we have Australia, tomorrow India, Canada, Brazil and Poland.

We already know what the ECB, Japan and Australia will do, but the picture is bleaker in the Latam, Eastern European space where we are likely to see a tightening bias continuing. India could hint at a hike in 2022 in a change of direction as stagflationary forces increase. We can safely assume that all of Asia except Singapore and South Korea will be on hold until 2022. Turkey will be the outlier, where the currency collapse and surge in inflation could lead to another drop in Erdogan-omics rates. The tightening of US monetary policy has not been fully recognized or appreciated by the markets, and further divergence in this regard from Turkey will continue to make the short pound the easiest trade on the planet. I’m just wondering where on my 2022 calendar to write in USD / TRY at 20.0000.

The situation in the real estate developer industry in China remains fluid, with Evergrande and Kaisa both seeking to restructure all of their debt, including offshore bonds. But the industry’s heavily indebted companies remain in deeply troubled territory with more offshore debt obligations due this week. The first seeds of a solution seem to be occurring, however, led by the reduction of the RRR and the hopes of debt restructuring. I insist on hopes because a positive outcome is far from certain. This story still has a long way to go and any short-term rally in the predominantly Hong Kong listed sector should be approached with extreme caution.

The Reserve Bank of Australia left its key rates unchanged today, as expected. They left a glimmer of leeway in the accompanying statement to act on tariffs earlier if necessary. We can expect similar release clauses from a few central banks next week, most likely from the ECB. The Australian dollar rallied slightly, but it and its cousin the kiwi remain at the mercy of a nervous global risk sentiment, omicron, FOMC or whatever.

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