Santa down with Omicron?
Some weekend headlines to start…
- Central Banks Worry Omicron Could Sustain Inflation (WSJ)
- Omicron Variant Risks Recovery Momentum on Bloomberg Trade Tracker
- Sydney and Melbourne go into ‘mini-lockdown’ as thousands cancel restaurant bookings
- Omicron travel curbs threaten to wreck Europe’s winter season
- Denmark Plans Stricter Covid Rules, No Lockdown, Premier Says
- Dutch are first in EU to re-enter lockdown in face of Omicron surge
- ‘No evidence’ Omicron less severe than Delta, say UK researchers
- Amazon disrupts as UK couriers prepare for tough Christmas
- New York’s surge shows no sign of slowing down
- Brexit minister’s shock resignation leaves Boris Johnson reeling
- Biden to Issue ‘Stark Warning’ on Vaccination Amid Covid Surge
- Manchin slams the door on Biden’s $1.75 trillion investment bill
LAST WEEK’S ACTION
Bog standard risk off profile — NQ the worst performing, Silver up top while USD reigns supreme in FX…
EQUITIES
After the big bounce of the previous week, I was interested whether the top performers would continue to hold up or lead broad risk higher in case I needed to steer clear of my bearish view. It hasn’t done so and I think Nifty50 would be an interesting one to monitor this week as price action has been quite bearish the whole of last weak.
MSCI World unable to hold above the 20wma has carved out a potential right shoulder; SPX and NDX also exhibiting a similar pattern.
MSCI ex-US printed a new low last week after a long trend of lower highs and lows; Developed and Emerging ex-China are leaning heavy on at the low end of the year’s range.
Outperformance in defensive sectors also consistent with deteriorating appetite for riskier assets.
Not much movement in Skew and Taildex but DIX and GEX made a big reversal finishing the week lower than the pre-FOMC low which is anything but bullish as of Friday close.
Also dealer gamma is now negative where we tend to see some exacerbated moves as dealers will have to buy/sell more of the underlying to neutralize/hedge their gamma exposure the more price moves against them — could be an ugly start to the Christmas week. Will be watching to see how this develops with OPEX behind us to see whether there is some BTD sentiment building.
RATES
Market continues to price in the potential for faster taper and lift-off after some very hawkish comments from Waller and major Central bankers last week — note the leg lower to new lows in the Mar and Jun Eurodollar contracts.
COMMODITIES
CRB commodities index (green) has been rolling over sharply as 5yr Inflation breakeven has started to moderate towards the 2% mark and along with USD continuing to get bid, it would not surprise me at all to see it pullback towards 2021Q2 levels towards the 200 mark with USD continuing to get bid up.
TRADE VIEWS/IDEAS
Views from last week largely unchanged… (mildly bearish risk)
Running trades: NDX and Gold short
At the beginning of the month I argued that we were unlikely to see a Santa rally this year, mostly due to a more hawkish fed and its effect on US real yields. I thought there would be a strong possibility being wrong after the FOMC short squeeze left SPX with a record high weekly close. Fortunately stuck to my guns and reshorted NDX 16,400s.
Also on similar theme above- higher real yields and softer risk appetite into year end, the Gold spike towards 1815 on Friday seemed too attractive not to have a go and went max short with a tight leash. It closed below the 1800 handle with a gravestone Doji print.
I am looking to scale out of these however as I am concerned about lower nominal yields from continued risk-off and fresh inflation concerns also limiting the recovery in real yields while Omicron just might see some Tech stocks favoured again with yields getting depressed from the risk aversion.
Potential ideas: Cross-JPY and EMFX short
Not too keen on new trades this week but I would prefer to play on the softer sentiment and the likely absence of a santa rally, expressed via AUDJPY GBPJPY and EMFX short ideas on intraday-basis.
Keeping pro-risk ideas on the back-burner for now and possibly til the New Year but I will be looking out for potentially deep dips to buy into should we get a big sell-off or low liquidity flash crashes.
Wishing you a safe and merry Christmas!
