Tuesday, December 7, 2021

The New Known Unknowns

 

By Jeffrey Cane |  Tuesday, November 30

'This Is Not Going to Be Good.' Investors arguably overreacted to the emergence of a new Covid variant on Friday, and were far too sanguine about it yesterday. Today, the right amount of worry was again elusive.

There appeared to be a lot to worry about. First to jolt investors were comments by Moderna CEO Stéphane Bancel questioning whether current vaccines would be effective enough against the Omicron variant.  “I think it’s going to be a material drop," Bancel told the Financial Times.  "I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to . . . are like, ‘This is not going to be good.’ ”

With the market already down, Federal Reserve Chairman Jerome Powell set off more warning sirens for the markets late in the morning by saying that the Fed could start winding down its stimulus program at a faster pace than many had expected.

Testifying before the Senate Banking Committee, the Fed chief acknowledged that the Omicron variant posed "downside risks." Still, Powell said: 

The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.

Nathan Koppikar, a portfolio manager at the San Francisco hedge fund Orso Partners, told the New York Times afterward that "the Fed is finally sort of putting their stake in the ground and saying that the bubble has gone on long enough.”

Yet neither development -- the prospect of a faster tapering and the uncertainty over a mutant coronavirus -- should have have surprised investors as much as both did. 

Several Fed officials, including Vice Chairman Richard Clarida, have said that the central bank should consider accelerating the taper at the next policy meeting, on Dec. 14-15, as Randall Forsyth noted in Barron's a week ago. 

And while the emergence of a new Covid variant is troubling as a public health issue, it is becoming familiar territory for the economy. Deutsche Bank analysts offered this perspective:   

Many commentators are treating the new Omicron Covid variant as a big new development for the outlook. It isn’t. The global economy has been going through multiple virus waves throughout the year; and market pricing is currently where it is because of Covid not in spite of it. Omicron simply reinforces trends that were unfolding anyway. … 

The simple observation is that the market was never pricing great macro outcomes anyway this year -- the “gangbusters” story peaked way back in the first quarter, and ever since we have been pricing recurring Covid waves, falling trend growth, too much precautionary savings/liquidity, a very late-cycle economy, and inflation for “bad” reasons. That's why real yields have stayed stuck at record negative levels, why central bank terminal rates haven't been able to reprice, and the dollar has rallied.

Stocks, nonetheless, finished the day near their lows for the session. The S&P 500 closed down 1.9%. All 11 sectors ended in the red; only 7 of the index components saw gains. The benchmark index is down nearly 3% from its record close set on Nov. 18. 

The Dow Jones Industrial Average ended down 1.9%, while the Nasdaq Composite closed down 1.6%. Apple (up 3.2% on the day) was the star standout among stocks. The Russell 2000 fell 1.9%, bringing it less than a point shy of correction territory. 

The hawkish tenor of Powell's remarks lifted yields on interest-rate sensitive short-term Treasury securities, flattening the yield curve. The yield on the two-year Treasury note settled at 0.524%, while the yield on the 10-year Treasury note fell, to 1.440%.

The energy market is where fears that the Omicron variant could sap economic demand have been most keenly felt. January crude oil futures fell 5.4% today, to $66.18 a barrel, its third decline in the last four trading sessions.  For the month, oil has had its sharpest decline since March 2020 -- when lockdowns shut down travel and businesses around the world.  OPEC and its allies meet on Thursday to discuss whether there should be any changes to their production policy. 

Gold was also lower today, down 0.5%, to $1773.60. The U.S. dollar was slightly weaker, as was Bitcoin, which traded at $57,144 this afternoon. 

Worrying is also a market onto itself. The Cboe Market Volatility Index, or Vix, ended November with a 67.2% gain for the month. That's the most volatile month for the index known as "Wall Street's fear gauge" since February 2020, when the index spiked 112.9% on the eve of the pandemic.

 

 

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