Omicron Becomes Omigone

Markets party despite Omicron

You would be hard pushed to find a reason not to be in a jubilant mood as an investor as financial markets dished out the happy new year’s overnight, the first trading day of the year. I spent it on a series of almost empty flights on the trek to managed isolation in New Zealand, but for the rest of the world, the New York session finished with plenty of New Year’s goodies. Stocks finished higher, oil moved higher, the US dollar moved higher, and US treasury yields moved higher. All signs that the US economy is starting the year in continuing recovery mode.

The chief reason behind the return of investor confidence is omicron, a trend really occurring since Christmas and the incessant “Jeff, will we get a Santa Claus rally?” As more data pours in, it seems that yes, the virus variant is much more contagious, but it is not leading to a proportionally larger number of hospital admissions, the opposite in fact. Quid pro quo, it won’t’ stop the global economic recovery, although China will remain locked up with Hong Kong and New Zealand, therefore “buy everything.”

Tesla jumped 13.0% overnight as it delivered more cars than forecast in Q4. The cost of replacing batteries remains its dirty little secret, and is highly ironic in some ways, as a four-wheeled tree hugger that has fewer moving parts than a normally aspirated petrol burner. Google “Finn,” “explosives’”, “battery,” and “Tesla” for one man’s adventure with an “ancient” 2013 Tesla.  Apple also briefly touched a USD 3 trillion market cap yesterday, mostly because it’s Apple and its cool, but also because the street wanted to see a 3-handle.

One warning sign around equity exuberance though is the US bond market, with US 10-year yields climbing around 13 basis points to 1.635%, its highest, I believe, since late October. With a return of the post-Omicron buy everything trade, will come to the hard realisation that globally, inflation continues and yields globally, have likely seen the bottom. Monetary policy normalisation will be the name of the game for central banks, although it will look more normal in some countries than in others. The US, Russia, Latin America, and the Commonwealth countries will show normalisation to greater and larger extents. Japan and the Eurozone will change the names on the doors but keep monetising their government’s debt the same as ever behind it, while much of Asia, will tolerate stagflation to support growth making them mostly “bold and hold.”

Although the omicron relief trade could continue dominating investor sentiment for much of January, the new budget year always needs a “throw the kitchen sink at it” to get started, the US bond market is telling us not to get too carried away. Bitter experience also tells me that the first big direction trade of the year is usually wrong. Stock markets, in particular, will have to work much harder to make an honest dollar in 2022, as monetary policy settings get moved back from fantasy to reality.

Asian markets though are showing omicron resilience, with China and pan-Asian Manufacturing PMIs over the last couple of days, mostly outperforming for December. Today’s China Caixin Manufacturing PMI rose to 50.9, while Japan’s Jibun Bank PMI reading held steady at 54.3. Yesterday, Singapore GDP also proved resilient, with 2021 GDP finishing 7.20% for the year, completely reversing with interest, the 5.40% contraction of 2020. That, interestingly, is a trend that has been repeated all over the world, it just doesn’t feel like it in our everyday life.

Germany’s Unemployment and Retail Sales kick off Europe’s week, along with French Inflation. The US releases the JOLTS Job Openings and US ISM Manufacturing PMI. Omicron headlines will likely have a diminishing impact now that the new year has started and with the data seemingly clear about its virulence. If today’s data from Germany and the US show employment and job vacancies holding firm versus omicron, investors should the year in an ebullient mood as omicron becomes omigone.

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