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BTFDers Unleashed: Futures, Yields, Oil Jump As Omicron Panic Eases

Tyler Durden's Photo
by Tyler Durden
Monday, Nov 29, 2021 - 08:01 AM

As expected over the weekend, and as we first noted shortly after electronic markets reopened for trading on Sunday, S&P futures have maintained their overnight gains and have rebounded 0.7% while Nasdaq contracts jumped as much as 1.3% after risk sentiment stabilized following Friday’s carnage and as investors settled in for a few weeks of uncertainty on whether the Omicron variant would derail economic recoveries and the tightening plans of some central banks. Japan led declines in the Asian equity session (which was catching down to Friday's US losses) after the government shut borders to visitors. The region’s reopening stocks such as restaurants, department stores, train operators and travel shares also suffered some losses.  Oil prices bounced $3 a barrel to recoup some of Friday's rout, while the safe haven yen, Swiss franc and 10Y Treasury took a breather after its run higher.

Moderna shares jumped as much as 12% in pre-market trading after Chief Medical Officer Paul Burton said he suspects the new omicron coronavirus variant may elude current vaccines, and if so, a reformulated shot could be available early in the new year. Which he would obviously say as his company makes money from making vaccines, even if they are not very efficient. Here are some of the other notable premarket movers today:

  • BioNTech (BNTX US) advanced 5% after it said it’s starting with the first steps of developing a new adapted vaccine, according to statement sent by text.
  • Merck & Co. (MRK US) declined 1.6% after it was downgraded to neutral from buy at Citi, which also opens a negative catalyst watch, with “high probability” the drugmaker will abandon development of its HIV treatment.
  • A selection of small biotechs rise again in U.S. premarket trading amid discussion of the companies in StockTwits and after these names outperformed during Friday’s market rout. Palatin Tech (PTN US) +37%, Biofrontera (BFRI US) +22%, 180 Life Sciences (ATNF US) +19%.

Bonds gave back some of their gains, with Treasury futures were down 11 ticks. Like other safe havens, the market had rallied sharply as investors priced in the risk of a slower start to rate hikes from the U.S. Federal Reserve, and less tightening by some other central banks.

Needless to say, Omicron is all anyone can talk about: on one hand, authorities have already orchestrated a lot of global panic: Britain called an urgent meeting of G7 health ministers on Monday to discuss developments on the virus, even though the South African doctor who discovered the strain and treated cases said symptoms of Omicron were so far mild. The new variant of concern was found as far afield as Canada and Australia as more countries such as Japan imposed travel restriction to try to seal themselves off.

Summarizing the fearmongering dynamic observed, overnight South African health experts - including those who discovered the Omicron variant, said it appears to cause mild symptoms, while the Chinese lapdog organization, WHO, said the variant’s risk is “extremely high”.

Investors are trying to work out if the omicron flareup will a relatively brief scare that markets rebound from, or a bigger blow to the global economic recovery. Much remains unanswered about the new strain: South African scientists suggested it’s presenting with mild symptoms so far, though it appears to be more transmissible, but the World Health Organization warned it could fuel future surges of Covid-19 with severe consequences.

"There is a lot we don't know about Omicron, but markets have been forced to reassess the global growth outlook until we know more," said Rodrigo Catril, a market strategist at NAB. "Pfizer expects to know within two weeks if Omicron is resistant to its current vaccine, others suggest it may take several weeks. Until then markets are likely to remain jittery."

"Despite the irresistible pull of buying-the-dip on tenuous early information on omicron, we are just one negative omicron headline away from going back to where we started,” Jeffrey Halley, a senior market analyst at Oanda, wrote in a note. “Expect plenty of headline-driven whipsaw price action this week.”

The emergence of the omicron strain is also complicating monetary policy. Traders have already pushed back the expected timing of a first 25-basis-point rate hike by the Federal Reserve to July from June. Fed Bank of Atlanta President Raphael Bostic played down economic risks from a new variant, saying he’s open to a quicker paring of asset purchases to curb inflation. Fed Chair Jerome Powell and Treasury Secretary Janet Yellen speak before Congress on Tuesday and Wednesday.

“We know that central banks can quickly switch to dovish if they need to,” Mahjabeen Zaman, Citigroup senior investment specialist, said on Bloomberg Television. “The liquidity playbook that we have in play right now will continue to support the market.”

European stocks rallied their worst drop in more than a year on Friday, with travel and energy stocks leading the advance. The Stoxx 600 rose 0.9% while FTSE 100 futures gain more than 1%, aided by a report that Reliance may bid for BT Group which jumped as much as 9.5% following a report that India’s Reliance Industries may offer to buy U.K. phone company, though it pared the gain after Reliance denied it’s considering a bid.

European Central Bank President Christine Lagarde put a brave face on the latest virus scare, saying the euro zone was better equipped to face the economic impact of a new wave of COVID-19 infections or the Omicron variant

Japanese shares lead Asian indexes lower after Premier Kishida announces entry ban of all new foreign visitors. Hong Kong’s benchmark Hang Seng Index closed down 0.9% at the lowest level since October 2020, led by Galaxy Entertainment and Meituan. The index followed regional peers lower amid worries about the new Covid variant Omicron. Amid the big movers, Galaxy Entertainment was down 5.4% after police arrested Macau’s junket king, while Meituan falls 7.1% after reporting earnings.

In FX, currency markets are stabilizing as the week kicks off yet investors are betting on the possibility of further volatility. The South African rand climbed against the greenback though most emerging-market peers declined along with developing-nation stocks. Turkey’s lira slumped more than 2% after a report at the weekend that President Recep Tayyip Erdogan ordered a probe into foreign currency trades.

The Swiss franc, euro and yen retreat while loonie and Aussie top G-10 leaderboard after WTI crude futures rally more than 4%. The Bloomberg Dollar Spot Index hovered after Friday’s drop, and the greenback traded mixed against its Group-of-10 peers; commodity currencies led gains. The euro slipped back below $1.13 and Bunds sold off, yet outperformed Treasuries. The pound was steady against the dollar and rallied against the euro. Australian sovereign bonds pared an opening jump as Treasuries trimmed Friday’s spike amid continuing uncertainty over the fallout from the omicron variant. The Aussie rallied with oil and iron ore. The yen erased an earlier decline as a government announcement on planned border closures starting Tuesday spurred a drop in local equities. The rand strengthens as South African health experts call omicron variant “mild.”

In rates, Treasuries were cheaper by 4bp-7bp across the curve in belly-led losses, reversing a portion of Friday’s sharp safe-haven rally as potential economic impact of omicron coronavirus strain continues to be assessed. The Treasury curve bear- steepened and the benchmark 10-year Treasury yield jumped as much as 7 basis points to 1.54%; that unwound some of Friday’s 16 basis-point plunge -- the steepest since March 2020.  Focal points include month-end on Tuesday, November jobs report Friday, and Fed Chair Powell is scheduled to speak Monday afternoon. Treasuries broadly steady since yields gapped higher when Asia session began, leaving 10-year around 1.54%, cheaper by almost 7bp on the day; front-end outperformance steepens 2s10s by ~3bp. Long-end may draw support from potential for month-end buying; Bloomberg Treasury index rebalancing was projected to extend duration by 0.11yr as of Nov. 22

In commodities, oil prices bounced after suffering their largest one-day drop since April 2020 on Friday.

"The move all but guarantees the OPEC+ alliance will suspend its scheduled increase for January at its meeting on 2 December," wrote analyst at ANZ in a note. "Such headwinds are the reason it's been only gradually raising output in recent months, despite demand rebounding strongly."

Brent rebounded 3.9% to $75.57 a barrel, while U.S. crude rose 4.5% to $71.24. Gold has so far found little in the way of safe haven demand, leaving it stuck at $1,791 an ounce . SGX iron ore rises almost 8% to recoup Friday’s losses. Bitcoin rallied after falling below $54,000 on Friday.

Looking at today's calendar, we get October pending home sales, and November Dallas Fed manufacturing activity. We also get a bunch of Fed speakers including Williams, Powell making remarks at the New York Fed innovation event, Fed’s Hassan moderating a panel and Fed’s Bowman discussing central bank and indigenous economies.

Market Snapshot

  • S&P 500 futures up 0.6% to 4,625.00
  • MXAP down 0.9% to 191.79
  • MXAPJ down 0.4% to 625.06
  • Nikkei down 1.6% to 28,283.92
  • Topix down 1.8% to 1,948.48
  • Hang Seng Index down 0.9% to 23,852.24
  • Shanghai Composite little changed at 3,562.70
  • Sensex up 0.4% to 57,307.46
  • Australia S&P/ASX 200 down 0.5% to 7,239.82
  • Kospi down 0.9% to 2,909.32
  • STOXX Europe 600 up 0.7% to 467.47
  • German 10Y yield little changed at -0.31%
  • Euro down 0.3% to $1.1283
  • Brent Futures up 3.8% to $75.49/bbl
  • Gold spot up 0.3% to $1,797.11
  • U.S. Dollar Index up 0.13% to 96.22

Top Overnight News from Bloomberg

  • The omicron variant of Covid-19, first identified in South Africa, has been detected in locations from Australia to the U.K. and Canada, showing the difficulties of curtailing new strains
  • While health experts in South Africa, where omicron was first detected, said it appeared to cause only mild symptoms, the Geneva-based WHO assessed the variant’s risk as “extremely high” and called on member states to test widely. Understanding the new strain will take several days or weeks, the agency said
  • All travelers arriving in the U.K. starting at 4 a.m. on Nov. 30 must take a PCR coronavirus test on or before the second day of their stay and isolate until they receive a negative result. Face coverings will again be mandatory in shops and other indoor settings and on public transport. Booster shots may also be approved for more age groups within days, according to Health Secretary Sajid Javid
  • The economic effects of the successive waves of the Covid pandemic have been less and less damaging, Bank of France Governor Francois Villeroy de Galhau says
  • Italian bonds advance for a third day, as investors shrug off new coronavirus developments over the weekend and stock futures advance, while bunds are little changed ahead of German inflation numbers and a raft of ECB speakers including President Christine Lagarde
  • A European Commission sentiment index fell to 117.5 in November from 118.6 the previous month, data released Monday showed
  • Spanish inflation accelerated to the fastest in nearly three decades in November on rising food prices, underscoring the lingering consequences of supply-chain bottlenecks across Europe. Consumer prices jumped 5.6%
  • Energy prices in Europe surged on Monday after weather forecasts showed colder temperatures for the next two weeks that will lift demand for heating
  • ECB Executive Board member Isabel Schnabel took to the airwaves to reassure her fellow Germans that inflation will slow again, hours before data set to show the fastest pace of price increases since the early 1990s
  • Russia’s ambassador to Washington said more than 50 diplomats and their family members will have to leave the U.S. by mid-2022, in the latest sign of tensions between the former Cold War enemies
  • China sent the biggest sortie of warplanes toward Taiwan in more than seven weeks after a U.S. lawmaker defied a Chinese demand that she abandon a trip to the island

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded cautiously and US equity futures rebounded from Friday’s hefty selling (S&P 500 -2.3%) as all focus remained on the Omicron variant after several countries announced restrictions and their first cases of the new variant, although markets took solace from reports that all cases so far from South Africa have been mild. Furthermore, NIH Director Collins was optimistic that current vaccines are likely to protect against the Omicron variant but also noted it was too early to know the answers, while Goldman Sachs doesn’t think the new variant is a sufficient reason to adjust its portfolio citing comments from South Africa’s NICD that the mutation is unlikely to be more malicious and existing vaccines will most likely remain effective at preventing hospitalizations and deaths. ASX 200 (-0.5%) is subdued after Australia registered its first cases of the Omicron variant which involved two people that arrived in Sydney from southern Africa and with the government reviewing its border reopening plans. Nikkei 225 (-1.6%) whipsawed whereby it initially slumped at the open due to the virus fears and currency-related headwinds but then recouped its losses and briefly returned flat as the mood gradually improved, before succumbing to a bout of late selling, and with mixed Retail Sales data adding to the indecision. Hang Seng (-1.0%) and Shanghai Comp. (Unch) weakened with Meituan the worst performer in Hong Kong after posting a quarterly loss and with casino names pressured by a crackdown in which police detained Suncity Group CEO and others after admitting to accusations including illegal cross border gambling. However, the losses in the mainland were cushioned after firm Industrial Profits data over the weekend and with local press noting expectations for China to adopt a more proactive macro policy next year. Finally, 10yr JGBs shrugged off the pullback seen in T-note and Bund futures, with price action kept afloat amid the cautious mood in stocks and the BoJ’s presence in the market for over JPY 900bln of JGBs mostly concentrated in 3yr-10yr maturities.

Top Asian News

  • Hong Kong Stocks Slide to 13-Month Low on Fresh Virus Woes
  • Li Auto Loss Narrows as EV Maker Rides Out Supply-Chain Snarls
  • Singapore Adds to Its Gold Pile for the First Time in Decades
  • China Growth Stocks Look Like Havens as Markets Confront Omicron

Bourses in Europe are experiencing a mild broad-based rebound (Euro Stoxx 50 +1.0%; Stoxx 600 +0.9%) following Friday's hefty COVID-induced losses. Desks over the weekend have been framing Friday's losses as somewhat overstretched in holiday-thinned liquidity, given how little is known about the Omicron variant itself. The strain will likely remain the market theme as scientists and policymakers factor in this new variant, whilst data from this point forth – including Friday's US labour market report - will likely be passed off as somewhat stale, and headline risk will likely be abundant. Thus far, symptoms from Omicron are seemingly milder than some of its predecessors, although governments and central banks will likely continue to express caution in this period of uncertainty. Back to price action, the momentum of the rebound has lost steam; US equity futures have also been drifting lower since the European cash open – with the RTY (+0.9%) was the laggard in early European trade vs the ES (+0.8%), NQ (+1.0%) and YM (+0.7%). European cash bourses have also been waning off best levels but remain in positive territory. Sectors are mostly in the green, but the breadth of the market has narrowed since the cash open. Travel & Leisure retains the top spot in what seems to be more a reversal of Friday's exaggerated underperformance as opposed to a fundamentally driven rebound – with more nations announcing travel restrictions to stem the spread of the variant. Oil & Gas has also trimmed some of Friday's losses as oil prices see a modest rebound relative to Friday's slump. On the other end of the spectrum, Healthcare sees mild losses as COVID-related names take a mild breather, although Moderna (+9.1% pre-market) gains ahead of the US open after its Chief Medical Officer suggested a new vaccine for the variant could be ready early next year. Meanwhile, Autos & Parts reside as the current laggard amid several bearish updates, including a Y/Y drop in German car exports - due to the chip shortage and supply bottlenecks – factors which the Daimler Truck CEO suggested will lead to billions of Euros in losses. Furthermore, auto supbt.aplier provider Faurecia (-5.9%) trades at the foot of the Stoxx 600 after slashing guidance – again a function of the chip shortage. In terms of Monday M&A, BT (+4.7%) shares opened higher by almost 10% following source reports in Indian press suggesting Reliance Industries is gearing up for a takeover approach of BT – reports that were subsequently rebuffed.

Top European News

  • U.K. Mortgage Approvals Fall to 67,199 in Oct. Vs. Est. 70,000
  • Johnson Matthey Rises on Report of Battery Talks With Tata
  • Gazprom Reports Record Third-Quarter Profit Amid Gas Surge
  • Omicron’s Spread Fuels Search for Answers as WHO Sounds Warning

In FX, the Buck has bounced from Friday’s pullback lows on a mixture of short covering, consolidation and a somewhat more hopeful prognosis of SA’s new coronavirus strand compared to very early perceptions prompted by reports that the latest mutation would be even worse than the Delta variant. In DXY terms, a base above 96.000 is forming within a 93.366-144 band amidst a rebound in US Treasury yields and re-steepening along the curve following comments from Fed’s Bostic indicating a willingness to back faster QE tapering. Ahead, pending home sales and Dallas Fed business manufacturing along with more Fed rhetoric from Williams and chair Powell on the eve of month end.

  • AUD/CAD/NZD - No surprise to see the high beta and risk sensitive currencies take advantage of the somewhat calmer conditions plus a recovery in crude and other commodities that were decimated by the prospect of depressed demand due to the aforementioned Omicron outbreak. The Aussie is back over 0.7150 vs its US counterpart, the Loonie has pared back losses from sub-1.2750 with assistance from WTI’s recovery to top Usd 72/brl vs a Usd 67.40 trough on November 26 and the Kiwi is hovering above 0.6800 even though RBNZ chief economist Ha has warned that a pause in OCR tightening could occur if the fresh COVID-19 wave proves to be a ‘game-changer’.
  • JPY/EUR - The major laggards as sentiment stabilses, with the Yen midway between 112.99-113.88 parameters and hardly helped by mixed Japanese retail sales data, while the Euro has retreated below 1.1300 where 1.7 bn option expiry interest resides and a key Fib level just under the round number irrespective of strong German state inflation reports and encouraging pan Eurozone sentiment indicators, as more nations batten down the hatches to stem the spread of SA’s virus that has shown up in parts of the bloc.
  • GBP/CHF - Both narrowly divergent vs the Dollar, as Cable retains 1.3300+ status against the backdrop of retreating Gilt and Short Sterling futures even though UK consumer credit, mortgage lending and approvals are rather conflicting, while the Franc pivots 0.9250 and meanders from 1.0426 to 1.0453 against the Euro after the latest weekly update on Swiss bank sight deposits showing no sign of official intervention. However, Usd/Chf may veer towards 1.1 bn option expiries at the 0.9275 strike if risk appetite continues to improve ahead of KoF on Tuesday and monthly reserves data.
  • SCANDI/EM - Although Brent has bounced to the benefit of the Nok, Sek outperformance has ensued in wake of an upgrade to final Swedish Q3 GDP, while the Cnh and Cny are deriving support via a rise in Chinese industrial profits on a y/y basis and the Zar is breathing a sigh of relief on the aforementioned ‘better’ virus updates/assessments from SA on balance. Conversely, the Try is back under pressure post-a deterioration in Turkish economic sentiment vs smaller trade deficit as investors look forward to CPI at the end of the week. Meanwhile, Turkish President Erdogan provides no reprieve for the Lira as he once again defending his unorthodox view that higher interest rates lead to higher inflation.

In commodities, WTI and Brent front-month futures consolidate following an overnight rebound – with WTI Jan back on a USD 71/bbl handle and Brent Feb just under USD 75/bbl – albeit still some way off from Friday's best levels which saw the former's high above USD 78/bbl and the latter's best north of USD 81/bbl. The week is packed with risks to the oil complex, including the resumption of Iranian nuclear talks (slated at 13:00GMT/08:00EST today) and the OPEC+ monthly confab. In terms of the former, little is expected in terms of progress unless the US agrees to adhere to Tehran's demand – which at this point seems unlikely. Tehran continues to seek the removal of US sanctions alongside assurances that the US will not withdraw from the deal. "The assertion that the US must 'change its approach if it wants progress' sets a challenging tone", Citi's analysts said, and the bank also expects parties to demand full access to Iranian nuclear facilities for verification of compliance. Further, the IAEA Chief met with Iranian officials last week; although concrete progress was sparse, the overall tone of the meeting was one of progress. "We remain of the opinion that additional Iranian supplies are unlikely to reach the market before the second half of 2022 at the earliest," Citi said. Meanwhile, reports suggested the US and allies have been debating a "Plan B" if talks were to collapse. NBC News – citing European diplomats, former US officials and experts – suggested that options included: 1) a skinny nuclear deal, 2) ramp up sanctions, 3) Launching operations to sabotage Iranian nuclear advances, 4) Military strikes, 5) persuading China to halt Iranian oil imports, albeit Iran and China recently signed a 25yr deal. Over to OPEC+, a rescheduling (in light of the Omicron variant) sees the OPEC and JTC meeting now on the 1st December, followed by the JMMC and OPEC+ on the 2nd. Sources on Friday suggested that members are leaning towards a pause in the planned monthly output, although Russian Deputy PM Novak hit the wires today and suggested there is no need for urgent measures in the oil market. Markets will likely be tested, and expectations massaged with several sources heading into the meeting later this week. Elsewhere, spot gold trades sideways just under the USD 1,800/oz and above a cluster of DMAs, including the 50 (1,790.60/oz), 200 (1,791.30/oz) and 100 (1,792.80/oz) awaiting the next catalyst. Over to base metals, LME copper recoups some of Friday's lost ground, with traders also citing the underlying demand emanating from the EV revolution.

US Event Calendar

  • 10am: Oct. Pending Home Sales YoY, prior -7.2%
  • 10am: Oct. Pending Home Sales (MoM), est. 0.8%, prior -2.3%
  • 10:30am: Nov. Dallas Fed Manf. Activity, est. 17.0, prior 14.6

Central Bank speakers:

  • 3pm: Fed’s Williams gives opening remarks at NY Innovation Center
  • 3:05pm: Powell Makes Opening Remarks at New York Fed Innovation Event
  • 3:15pm: Fed’s Hassan moderates panel introducing NY Innovation Center
  • 5:05pm: Fed’s Bowman Discusses Central bank and Indigenous Economies

DB's Jim Reid concludes the overnight wrap

Last night Henry in my team put out a Q&A looking at what we know about Omicron (link here) as many risk assets put in their worst performance of the year on Friday after it exploded into view. The main reason for the widespread concern is the incredibly high number of mutations, with 32 on the spike protein specifically, which is the part of the virus that allows it to enter human cells. That’s much more than we’ve seen for previous variants, and raises the prospect it could be a more transmissible version of the virus, although scientists are still assessing this.

South Africa is clearly where it has been discovered (not necessarily originated from) and where it has been spreading most. The fact that’s it’s become the dominant strain there in just two weeks hints at its higher level of contagiousness. However the read through to elsewhere is tough as the country has only fully vaccinated 24% of its population, relative to at least 68% in most of the larger developed countries bar the US which languishes at 58%.

It could still prove less deadly (as virus variants over time mostly are) but if it is more contagious that could offset this and it could still cause similar healthcare issues, especially if vaccines are less protective. On the other hand the South African doctor who first alerted authorities to the unusual symptoms that have now been found to have been caused by Omicron, was on numerous media platforms over the weekend suggesting that the patients she has seen with it were exhausted but generally had mild symptoms. However she also said her patients were from a healthy cohort so we can’t relax too much on this. However as South African cases rise we will get a lot of clues from hospitalisation data even if only 6% of the country is over 65s.

My personal view is that we’ll get a lot of information quite quickly around how bad this variant is. The reports over the weekend that numerous cases of Omicron have already been discovered around the world, suggests it’s probably more widespread than people think already. So we will likely soon learn whether these patients present with more severe illness and we’ll also learn of their vaccination status before any official study is out. The only caveat would be that until elderly patients have been exposed in enough scale we won’t be able to rule out the more negative scenarios.

Before all that the level of restrictions have been significantly ramped up over the weekend in many countries. Henry discusses this in his note but one very significant one is that ALL travellers coming into (or back to) the UK will have to self isolate until they get a negative PCR test. This sort of thing will dramatically reduce travel, especially short business trips. Overnight Japan have effectively banned ALL foreign visitors.

I appreciate its dangerous to be positive on covid at the moment but you only have to look at the UK for signs that boosters are doing a great job. Cases in the elderly population continue to collapse as the roll out progresses well and overall deaths have dropped nearly 20% over the last week to 121 (7-day average) - a tenth of where they were at the peak even though cases have recently been 80-90% of their peak levels. If Europe are just lagging the UK on boosters rather than anything more structural, most countries should be able to control the current wave all things being equal. However Omicron could make things less equal but it would be a huge surprise if vaccines made no impact.

Stocks in Asia are trading cautiously but remember that the US and Europe sold off more aggressively after Asia closed on Friday. So the lack of major damage is insightful. The Nikkei (-0.02%), Shanghai Composite (-0.14%), CSI (-0.22%), KOSPI (-0.47%) and Hang Seng (-0.68%) are only slightly lower.

Treasury yields, oil, and equity futures are all rising in Asia. US treasury yields are up 4-6bps across the curve, Oil is c.+4.5% higher, while the ZAR is +1.31%. Equity futures are trading higher with the S&P 500 (+0.71%) and DAX (+0.84%) futures in the green.

In terms of looking ahead, we may be heading into December this week but there’s still an incredibly eventful period ahead on the market calendar even outside of Omicron. We have payrolls on Friday which could still have a big impact on what the Fed do at their important December 15 FOMC and especially on whether they accelerate the taper. Wednesday (Manufacturing) and Friday (Services) see the latest global PMIs which will as ever be closely watched even if people will suggest that the latest virus surge and now Omicron variant may make it backward looking. Elsewhere in the Euro Area, we’ll get the flash CPI estimate for November tomorrow (France and Italy on the same day with Germany today), and we’ll hear from Fed Chair Powell as he testifies (with Mrs Yellen) before congressional committees tomorrow and Wednesday. There’s lots of other Fed speakers this week (ahead of their blackout from this coming weekend) and last week there was a definite shift towards a faster taper bias, even amongst the doves on the committee with Daly being the most important potential convert. Fed speakers this week might though have to balance the emergence of the new variant with the obvious point that without it the Fed is a fair bit behind the curve. Importantly but lurking in the background, Friday is also the US funding deadline before another government shutdown. History would suggest a tense last minute deal but it’s tough to predict.

Recapping last week now and the emergence of the new variant reshaped the whole week even if ahead of this, continued case growth across Europe prompted renewed lockdown measures and travel bans across the continent.

Risk sentiment clearly plummeted on Friday. The S&P 500 fell -2.27%, the biggest drop since October 2020, while the Stoxx 600 fell -3.67%, the biggest one-day decline since the original Covid-induced risk off in March 2020. The S&P 500 was -2.20% lower last week, while the Stoxx 600 was down -4.53% on the week. 10yr treasury, bund, and gilt yields declined -16.1bps, -8.7bps, and -14.5bps, undoing the inflation and policy response-driven selloff from earlier in the week. The drop in 10yr treasury and gilt yields were the biggest one-day declines since the original Covid-driven rally in March 2020, while the drop in bund yields was the largest since April 2020. 10yr treasury, bund, and gilt yields ended the week -7.3bps lower, +0.7bps higher, and -5.4bps lower, respectively.

Measures of inflation compensation declined due to the anticipated hit to global demand, with 10yr breakevens in the US and Germany -6.8bps and -8.8bps lower Friday, along with Brent and WTI futures declining -11.55% and -13.06%, respectively.

Investors pushed back the anticipated timing of rate hikes. As it stands, the first full Fed hike is just about priced for July, and 2 hikes are priced for 2022. This follows a hawkish tone from even the most dovish FOMC members and the November FOMC minutes last week. The prevailing sentiment was the FOMC was preparing to accelerate their asset purchase taper at the December meeting to enable inflation-fighting rate hikes earlier in 2022. Understanding the impact of the new variant will be crucial for interpreting the Fed’s reaction function, though. The impact may not be so obvious; while a new variant would certainly hurt global demand and portend more policy accommodation, it will also likely prompt more virus-avoiding behaviour in the labour market, preventing workers from returning to pre-Covid levels. Whether the Fed decides to accommodate these sidelined workers for longer, or to re-think what constitutes full employment in a Covid world should inform your view on whether they accelerate tapering in December.

It feels like a lifetime ago but last week also saw President Biden nominate Chair Powell to head the Fed for another term, and for Governor Brainard to serve as Vice Chair. The announcement led to a selloff in rates as the more dovish Brainard did not land the head job.

In Germany, the center-left SPD, Greens, and liberal FDP agreed to a full coalition deal. The traffic-light coalition agreed to restore the debt break in 2023, after being suspended during the pandemic, and to raise the minimum wage to €12 per hour. The SPD’s Olaf Scholz will assume the Chancellorship.

The US, China, India, Japan, South Korea, and UK announced releases of strategic petroleum reserves. Oil prices were higher following the announcement, in part because releases were smaller than anticipated but, as mentioned, prices dropped precipitously on Friday on the global demand impact of the new Covid variant.

The ECB released the minutes of the October Governing Council meeting, where officials stressed the need to maintain optionality in their policy setting. They acknowledged growing upside risks to inflation but stressed the importance of not overreacting in setting policy as they see how inflation scenarios might unfold.

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