Omicron reassessment, China’s big liquidity move and Bitcoin’s weekend plunge.
Pandemic
As more countries report cases of the omicron Covid-19 variant, there is some good news from South Africa where the strain was first identified. Initial data from major hospitals in the country shows that patients need less medical intervention, pointing to a milder infection than that caused by the delta variant. While this only represents numbers from the first two weeks of the infection wave, White House medical adviser Anthony Fauci said yesterday that the U.S. was encouraged by the reports. All the same, vaccine manufacturer Moderna Inc.’s President Stephen Hoge said there is a “ real risk” existing vaccines will be less effective against omicron.
Easing
This morning the People’s Bank of China cut the reserve requirement ratio for banks by 0.5 percentage points, releasing some 1.2 trillion yuan ($188 billion) of liquidity. The move, which puts the institution at odds with other central banks around the world, comes as the country faces sluggish economic growth and problems in the property sector. On the latter, China Evergrande Group is said to be planning to include
all its offshore debt obligations in its restructuring. Shares in the embattled developed plunged 20% in Asian trading hours to fall to a record low, with the 30-day grace period on two dollar bond interest payments ending today.Crypto
Bitcoin plunged on Saturday to as low as $42,296 before paring some of the tumble. The original digital currency was trading close to $47,600 by 5:50 a.m. Eastern Time this morning. That puts the coin more than 10% below Friday’s price. Other tokens, such as Ether, have almost fully recovered weekend losses. The underperformance points to the higher institutional holding of Bitcoin, meaning it trades more in line with other risk assets. El Salvador’s President Nayib Bukele said on Twitter that the country had again bought the dip, adding 150 coins.
Markets mixed
Stock market trading is mixed amid concerns about China’s moves to rein in the tech sector, a reassessment of the risk from omicron and continued uncertainty about the pace of monetary tightening. Overnight the MSCI Asia Pacific Index slipped 0.9% while Japan’s Topix index closed 0.5% lower. In Europe the Stoxx 600 Index had gained 0.3% by 5:50 a.m. with tech shares the worst performers. S&P 500 futures pointed to little change at the open, the 10-year Treasury yield was at 1.388%, oil was at $68 a barrel and gold was broadly flat.
Coming up...
It is a very quiet start to the week on the economic data front. For the U.S, Friday’s inflation number is the biggest event, with an expected annual increase of 6.7%. The central banks of Canada, Australia, Poland and Brazil all make decisions this week. As for today, MongoDB Inc., Coupa Software Inc. and Gitlab Inc. are among the companies reporting results.
What we've been reading
Here's what caught our eye over the weekend.
And finally, here’s what Joe’s interested in this morning
On the latest Odd Lots, Tracy Alloway and I talked to Richard Bookstaber, the famed expert on risk, whose book A Demon of Our Own Design is said to have presaged the global financial crisis. We talked about the risks he's thinking about right now, and given his background, you might think he sees some new bomb lurking somewhere in the plumbing of the financial system, ready to go off one day.
But actually it’s more pedestrian. His concern is that stocks might go down. Or to put it in a slightly more sophisticated manner, his concern is that stocks go down, and that people are insufficiently diversified. This could be particularly problematic for institutions, like endowments or pensions.
Bookstaber isn't bearish per se -- though he does see elevated risks due to leverage and concentrated bets. Still the timing is good, given the recent volatility in the market, with the VIX hovering at its highest levels since January.
Going back to Bookstaber for a second, it seems kind of funny to talk about the risk of stocks going down. Of course stocks can go down! Except by and large, downturns have been pretty short-lived. And one reason for that is every time we go through a sustained bout of selling, the Fed seems to ease policy in some way. The so-called Fed put. We saw this in 2018-2019. Markets sold off hard at the end of 2018, after Powell infamously talked about the Fed going beyond neutral. And then there were rate cuts in 2019.
Some see echoes of 2018-2019 today, but there's one glaring difference. Inflation is over 6% right now. Back then, the Fed was still struggling to hit its 2% target on a regular basis. As such, the bar towards something more dovish may be way higher right now. Or as Jon Turek and others have been putting it, the "Fed put has been re-struck lower."
In other words, there might be a point, where the Fed looks at volatility and thinks "ok, time to pivot towards something more dovish" but we need a lot more than this to get there, when inflation is still running this hot.
All that being said, the Fed hasn't hiked yet. Heck, it hasn't even formally accelerated the tapering process (though everyone expects it to). So perhaps all the angst over the Fed having gone too far and then needing to course-correct is way premature. Who knows?
But it's still worth thinking about the key point that in a period of elevated inflation, the type of Fed agility that provides succor to the market during periods of stress may not be there.
Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart
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