"Bring me hope, Take me home
I think I'm ready to be on my own
Close my eyes, lay me down
I think it's time that I take some time to be alone again"
- " Alone Again" Bruce, Liddell, Worsnop, Cassels, Good, Bettley (Asking Alexandria), 2021
Asian equity markets gave up roughly 2% across the board on Friday. On top of that, most of the heavily followed European markets opened more than 3% lower. As I make my way through this Market Recon morning note, West Texas Intermediate crude futures are trading off 7% while gasoline futures have already surrendered 6.5%. Is anything moving higher, you ask?
There has been some demand for gold. Bitcoin, though trading lower, is rebounding, and of course, there has been some intense demand for sovereign U.S. debt. The U.S. 10-year note yields 1.519% at the moment, which contrasts to the 1.641% where it went out for the holiday. This surge in demand for U.S. Treasury securities is evident for every series, from the Two-Year Note on out to the 30-Year Bond, as the all-important Three-Month/10-Year yield spread, the one spread the San Francisco Fed refers to as the most accurate predictor of economic growth/contraction in its tool box, has contracted from 158 basis points pre-Thanksgiving holiday to 151 basis points early on Friday morning.
The cause for this global risk-off, haven-seeking behavior is a new variant of the SARS-CoV-2 coronavirus (B.1.1.529) first identified in Botswana that is believed to be what is behind the most recent surge in new infections in South Africa and other southern African nations. While only a few actual cases have been identified, markets across the globe were clearly rattled on Thursday night (NY time) after Hong Kong confirmed that at least two cases of the new variant had already made it that far.
In response, the U.K. placed six southern African nations back on that nation's "red list" for travel restrictions. Direct flights from South Africa, Botswana, Namibia, Zimbabwe, Lesotho and Eswatini will be banned from midday Friday (London time), while returning travelers from those six nations will be forced to quarantine for 10 days at a government facility. In addition, Israel has already banned travel from South Africa, and the WHO (World Health Organization) will hold an emergency meeting on Friday to discuss this new variant.
There is no evidence as of yet that this new variant is any more dangerous than the Alpha or Delta variants that already broadly hit the planet and global economy rather severely. That said, the thing that has scientists so concerned is how different this new variant is from any variant that had already been identified to date.Might it be more transmissible? More lethal? More likely to evade humankind's current defenses?
According to multiple reports, B.1.1529 has as many as 32 mutations in the spike protein, which is the part of the virus that the vaccines currently in circulation use to prime the human immune system against COVID. The fear is these mutations in the spike protein may make it more difficult for immune cells to attack the pathogen, thus potentially rendering the ability of current vaccines to palliate the symptoms of the infection less effective.
According to The Financial Times, at least 59 cases of this new variation have been genomically sequenced, which sounds low, but local officials have told that publication that early PCR results show that perhaps 90% of 1,100 new cases on Wednesday in the Gauteng region of South Africa were caused by the new variant.
Equity markets close in the U.S. at 13:00 ET on Friday. Bond markets will close an hour later. It probably makes no difference at this point that market breadth was quite positive on Wednesday. It also probably makes no difference that on Wednesday the various federal agencies that do release macroeconomic data released a ton of it, and much of it was positive in nature. Initial Jobless Claims dropped precipitously from the prior week, Durable goods orders were strong, ex-defense and ex-transportation, personal income and personal spending both surprised to the upside, and wholesale inventory building for the month of October was just outstanding.
Obviously on Friday, with fewer market participants involved, there will be pressure on re-opening stocks, as we have already seen in Asia and across Europe. One could expect to see risk priced out of travel, lodging, leisure, materials and industrial stocks as traders and investors question the ability of regional and global economies to sustain the level of openness enjoyed over the latter half of 2021. Does this mean that once again, technology becomes defensive? Today might just be a risk-off session. It's very hard to discern this at zero-dark thirty after seriously committing the sin of gluttony only a few hours earlier.
Investors have found solace in the technology space, not just since the pandemic first showed up, but really since the powers of artificial price discovery took up permanent residence in Treasury markets going back many years now. Low rates/yields have placed tremendous valuation on this group, and this group is where the profits are. Profits will be taken, even at a discount to recent levels, as traders and investors will be forced to cover losses elsewhere and maybe even face margin calls... on Black Friday of all days. "Honey, you didn't buy little Bobby that X-Box yet, did you?"
Did you know, according to analysts at Bank of America and EPFR Global, that investors have poured $893 billion into ETFs (Exchange Traded Funds) and "long-only" funds just in 2021 to date. That number, which breaks down to $785 billion into ETFs and $108 billion into "long only" funds, amounts to more than the prior 19 years combined. Only twice this year have investors pulled money out of these funds, and the second of those two weeks was the week that ended this past Wednesday (Nov. 23), as equity funds suffered $2.7 billion in net outflows.
.... were still stuffing pumpkin pie into that hole in your face on Thursday, the Bank of (South) Korea increased its benchmark seven-day repurchase rate by 25 basis points to 1%. The move comes after South Korea's central bank had already increased this rate in August. This move also comes after the Reserve Bank of New Zealand raised its policy interest rate to 0.75% on Tuesday after already hiking that rate in October.
Does the rise of a new variant slow the Federal Reserve's plans, if there were any to be announced in early December, to pick up the pace of tapering its balance sheet expansion program? It could. One thing that the Federal Open Market Committee (FOMC) could do, if it had the creativity within it, which I seriously doubt, would be to continue on with the steady pace of reducing purchases by $15 billion per month, but flip from $10 billion fewer in Treasury purchases and $5 billion in MBS (mortgage-backed securities) purchases to the other way around. It has been beyond clear for almost a year that further support for MBS markets was already inappropriate, while perhaps, it might be wise to drag their feet on removing further accommodation for the provision toward funding the federal government at artificially low cost until we see what becomes of this new variant.
Happy Black Friday
Or maybe we should just call the period covering Thanksgiving through Cyber Monday. "Cyber Weekend." While scanning various balance sheets, it does appear that Walmart (WMT) , Target (TGT) and Best Buy (BBY) , among others, are ready for you based on pre-season inventory levels, while others such as Nordstrom (JWN) and Gap Inc. (GPS) have expressed concerns.
Keep your eyes on the work/play from home stocks such as Zoom Video ZM, DocuSign DOCU and Peloton PTON. I would think that the messenger RNA vaccine manufacturers will look good this morning. Both Pfizer (PFE) and Moderna (MRNA) are up sharply. Oh, and watch the transports.
Just keep your helmets on, gang, and buckle those chin straps. I don't wanna see any John Waynes among us.
Economics (All Times Eastern)
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 461.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (PDD) (0.28)