Like the printing press before them, the internet and Bitcoin’s blockchain innovation are irrevocable forces driving the end of nation-state power.
This article was originally published in Uncharted Territories.
It’s 2050. The U.S. government just defaulted on its debt. It’s not meeting its social security payments. Hospitals are going down: they can’t operate without Medicare and Medicaid income. Old people line up outside the hospitals, hospitals don’t service them, they can’t afford it. There's a run on the banks that held too many dollars, they are collapsing. All of the governments around the world caught with too much U.S. debt are defaulting. Those with their savings in dollars have been wiped out. They are looking at the last few decades of their lives like an empty ravine.
What happened? The internet and blockchain technology.
Every time a new information technology is discovered, our power structures change. Speech allowed chiefdoms. Writing allowed kingdoms, empires and churches. The printing press replaced the Catholic Church and feudalism with the nation state. Broadcasting made totalitarianism viable by allowing the efficient transmission of propaganda.
This time, we have not one but two new information technologies: the internet and blockchain technology. How will they undermine the nation state?
The Nation State Becomes Inconsequential
In the 19th and 20th centuries, nation states became the ultimate powers, thanks to their control of gatekeepers. This was nowhere as true as in broadcasting.
The government established the agenda of what was going to be discussed. It controlled what broadcasters would say. Information flowed from newspapers, TV, and radio to citizens. You could hardly influence it in democracies, forget about autocracies.
Then came the internet.
The Sovereign Individual
When I wrote “Why You Must Act Now,” I couldn’t conceive that it would be read by over 40 million people. When I wrote “The Hammer And The Dance,” I couldn’t fathom that governments around the world would draw inspiration from it.
A normal guy, surrounded by children in his San Francisco apartment, reading scientific papers in sweatpants, put out a piece that took governments around the world by surprise on the most important topic of their careers.
This would have been impossible 20 years ago: Back then, information flowed from gatekeepers with a tight relationship with governments, from newspapers to TV and radio stations. That establishment decided what people would think that day, and you couldn’t influence it.
You couldn’t search for the scientific papers you needed, because they weren’t available on the internet. And even if you got your hand on the data, you couldn’t let others know because we didn’t have social media. The internet gives you the inputs and outputs to short circuit the nation state and its gatekeeping gang.
That’s how QAnon spread like wildfire, convincing 15% of Americans that its conspiracy movement is legitimate (only 40% reject it), stoked by a pseudonymous person with intimate knowledge of game design.
That’s also how another pseudonymous person, Satoshi Nakamoto, created a trillion-dollar asset class by solving a math problem, writing about it, posting his article on the internet, and coding the Bitcoin blockchain.
Now people form their opinions online and spread them online. They interact online and transact online. Most of the time, governments don’t even know that this happens. Traditional gatekeepers are bypassed. No more approval from them.
Given how many authors are killed because of their creations, it’s not a coincidence that both QAnon and Nakamoto were pseudonymous: fake names allow more subversive changes without retaliation. Who’s going to cancel QAnon? Who is going to arrest Nakamoto to bring down Bitcoin?
What is new is not the value of pseudonymity or anonymity: historically, over half of books were pseudonymous or anonymous. What’s new is how easy it is to remain hidden. While crypto-Jews feared for their lives under the Inquisition, Nakamoto could be walking past you and you would never know it.
If a nation state can’t retaliate against creators, how can it prevent them from subverting the nation state?
“The Sovereign Individual” predicted most of this rise in individual power nearly 25 years ago. However, it focused more on the decentralization of power, which would flow from nation states to individuals. But the internet also has a centralization force.
The Rise Of Multinational Organizations
Who enables the search of scientific papers? Google. Who enables the spread of information? YouTube, Twitter, Facebook, LinkedIn, TikTok….
QAnon, the Bitcoin white paper, my COVID-19 articles, or any other person’s posts would have been highly unlikely to be created or distributed without the rise of behemoth tech companies.
The change goes beyond social media.
Who replaces your cabs? Uber. Lyft, too, if you’re in the U.S. And a couple more players internationally.
Who replaces your travel agencies? Booking.com, Google Flights, Expedia… Not thousands of companies.
Many of the industries that had millions of companies around the world now concentrate that wealth and influence in just a handful.
How much power do you think they wield? And where do you see that going?
Network effects account for 70% of the value created by tech companies. The more these network effects grow, the bigger these companies become, and the bigger share of the economy they represent.
As these companies grow, they start treating nation-states not as masters, but as peers:
“The director of public affairs of one of these companies pointed out that when he was in charge of relations with public authorities within a large traditional American company, he obeyed the regulators' instructions without negotiating: ‘then, we complied.’ Today, on the contrary, he states: ‘we don't surrender without negotiating hard first.’”
When Spain wanted to tax Google News, Google just stopped serving the country with the service. When nation states wanted to preserve their monopolies on cabs, Uber rolled over them until they accepted it. Airbnb disrupts local supply and demand of housing. Tesla challenges dealership laws. Cryptocurrency supporters push back on threatening laws. Apple did not give the FBI backdoor access to phones.
Social media is particularly powerful, by filtering what is acceptable for people to believe, by nudging them in some directions with their algorithms, and sometimes by taking the megaphone away from nation-state leaders.
And SpaceX will give everybody everywhere free access to the internet. Governments won’t be able to do much against it.
How will Venezuela censor the free flow of information that falls from the sky?
Look at the sad show of the U.S. Congress hearings of tech executives, or the deplorable show of the Federal Trade Commission case against Facebook. The nation states see the rise of alternative powers like the Church saw the rise of the Protestant Reformation. Both tried to fight, but they’re fighting against the unstoppable progress of technology, which drives the economy, so it will eventually win.
As a result, companies undermine nation states in two ways: On one side, by making information available, they extract power from nation-state gatekeepers and local companies to empower individuals to become more independent. But they also keep some of that power for themselves, becoming new gatekeepers.
This centralizing force of corporations is countered by the decentralization force of blockchains. But blockchain technology means a lot of things to a lot of people. What is it?
There is, of course, bitcoin as a store of value alternative to gold, and stablecoins and fiatcoins as alternatives to fiat currencies, making it that much harder for nation states to print money.
There is Ethereum, Cardano, DeFi, NFTs, and all the rest of the crypto economy, which is building an alternative to the existing economy that bolsters nation states.
Historically, how did you trust that your cab was legit? Because it had a license from the government. How did you know to eat in that restaurant? Because it was certified to be safe by the government. How did you know your house was yours? Because it was registered by the government. How did you know somebody was American? Because they had a passport from the government
You always needed a gatekeeper.
What about money? How did you certify you had money? You either showed the cash or you needed an attestation from your bank. How did you prove you knew something? You needed to show a certificate provided by an academic institution. How did you prove anything was true? You got a seal from a notary public.
You always needed a gatekeeper.
Nation states were the ultimate gatekeepers, because not only did they control their own services, but they also controlled the rest of the gatekeepers via regulation. They drew all of their might from this control.
Since the Bitcoin white paper was published, that power is gone. We haven’t needed gatekeepers to certify most of these things. You don’t need the corruption, absurd regulations, and abuse of power that goes with it. We can build better solutions with more crowd-sourced feedback, faster feedback, crypto-oracle verification. We just haven’t built all of these solutions yet.
The future is already in the brain of the 200 million cryptocurrency holders, who can be better understood as a country, as an alternative community to nation states.
A nation-state citizen doesn’t question the sovereignty of the government, doesn’t question the validity of its currency, doesn’t fathom a world without the TVs and radio stations and notary publics and certification organisms that make the nation state what it is. They wrap their heads around 20th-century country flags. They can’t fathom the end of the nation state, just as 1500s-era Europeans couldn’t fathom the end of the omnipotent Catholic Church.
None of this is true for blockchain citizens. They get it. They hodl (It’s the term for crypto — "hodling" instead of holding) crypto because they don’t trust fiat currencies. They build DAOs because they understand the corporation is on its way to the grave. They insist on smart contracts because how else are we going to trust each other?
Who do you think they have more in common with, their patriot neighbors or their crypto siblings? Do you see alternatives to nation states emerging already?
The Supranational Entities
If you’re alone, you don’t need a political system. The point of the government is to agree on how we will coordinate. The more people there are, the more coordination problems emerge, and the more we need to regulate. The size of governments has always grown with the size of the problems to solve.
It’s not a coincidence that the League of Nations appeared just after WWI, and the UN after WWII. New governance follows the size of the problems. Since then, a globalized financial system has birthed the International Monetary Fund and the World Bank to help countries in need of money in exchange for… a bit of their sovereignty. Or a lot. Ask Argentina. The World Trade Organization coordinates countries so that they can better trade between each other, at the expense of some of their sovereignty. They can’t do whatever they want in trade.
The only reason why the World Health Organization (WHO)’s failures have been so salient during the pandemic was because it was so needed. Who cares about a useless organization failing? But we do care about the WHO because we realize that pandemics are not a national problem. They’re global. The Delta variant didn’t care about the Indian soil that saw its birth. As long as countries let people in, it was going to travel with them.
In fact, the main reason why the WHO failed is because of nation states. It was China’s secrecy and its censorship over Taiwan and the American defunding and all this governance that depends on the dysfunctional nation states.
But eventually, some governance systems will emerge to fill the need of global pandemic coordination. Because that problem isn’t going away, and now we know.
Something similar can be said of climate change. Why, despite wildly popular support, are most countries not taking enough action? Because that support has not translated into the political action that nation states monopolize today. No wonder: nation states were never built for global action. They are obsolete to the problems we need to solve.
But why can’t a community emerge where citizens around the world can pledge support to the politicians who do want climate change policies? Why can’t they make that pledge a public, automatic commitment on the blockchain? It hasn’t happened yet because we haven’t gotten around to it. But it will. When that community emerges, will it be more or less powerful than nation states? Or simply another group that nibbles sovereignty away from nation states?
Somewheres Vs. Anywheres
The Somewheres identify with their locality: their city, local sports team, church, regional state, country. The Anywheres don’t care as much. They feel comfortable anywhere with liberal values, from Buenos Aires to Tokyo; places where they can connect to the internet to work, socialize, read… They have more affinity with those who think like them globally than those who live with them locally.
As more of our daily activities move online, as we interact more with people from across the world, identity will continue moving online. The more it does, the more people will leave the ranks of the Somewheres to join the Anywheres.
We know this because it already happened in the past.
Before the printing press, people in Europe talked mostly with their neighbors in their very local vernacular, while the Catholic Church spoke a universal Latin that gave them power. As the printing press started publishing in whichever local vernacular was most widely spoken — i.e., that of the biggest cities — it accelerated Latin’s demise while the local vernaculars of the biggest printing centers slowly grew in popularity until they became national languages that shared ideas and identity across geographies. This is what eventually led to the rise of nation states.
Now that people can talk with anybody in the world, exchange their ideas, find soulmates, and people who think alike, naturally their identity will outgrow nation states.
This will be accelerated because we have one clear winner as local vernacular:
Which results in the entire world learning English.
The more life happens online, the more content gets produced in the winning vernacular — English — and the more people learn it. As it spreads over the world, so do ideas and identity.
And the only way English doesn’t become the world’s lingua franca is if we get a universal translating device that really works, which would simply achieve the same goals faster.
So, let’s summarize. Nation states will become irrelevant as:
- Individuals become more powerful because they have access to more information, they can spread more information, and they can do so without national gatekeepers controlling their opinions
- The emergence of pseudonyms makes retaliation against individuals hard
- Corporations keep some of the sovereignty they take away from nation states, and start treating them as equals
- Blockchains decentralize power, making government gatekeepers obsolete
- Supranational organizations rise to solve global problems, extracting sovereignty from nation states along the way
- Communities of anywheres emerge globally, accelerated by the internet and blockchain technologies, the desire to fight global problems, the emergence of global governance systems, and an ability to better understand each other through a universal English or its equivalent translation technologies, diluting the patriotic sentiment
All of this erosion of sovereignty happens just as nation states go bankrupt. Even if they haven’t realized it yet.
The Nation State Is Broke
As nation states lose power, their ability to tax and print money will plummet, just as their costs skyrocket. How are they going to keep their promises then?
It’s not a secret that big corporations use international loopholes to avoid paying taxes. What is new is the nation states finally trying to rein them in.
Recently, about 135 countries agreed to fix a minimum floor to global corporate taxes. This is quite a feat: coordinating two-thirds of countries into anything is very hard. Look at climate change. If only countries had the same incentives in that area…
But that agreement obscures the reality that an agreement between 135 countries still leaves 60 countries that don’t participate. Sixty countries for loopholes.
More importantly, some countries’ existence depends on having lower taxes.
Before it reduced corporate taxes in 1995, Ireland was a pretty poor country. Now it’s the richest one per capita in Europe. This is mostly leprechaun economics, a reporting effect due to the oversize impact of big corporations — the average Irish person is not as rich. But it reflects how much Ireland has attracted companies thanks to lower taxes, companies that can then be taxed, even if just a little, thus filling the coffers.
So, why would Ireland agree to such a deal? Maybe because it does not intend to respect the spirit of the law?
None of this is new. Pharma and finance companies, among others, have been doing this forever, because their value depends mostly on intellectual property, so they’ve been avoiding taxes for a long time.
But this problem is about to enter turbo mode because companies are more global than ever. It’s easy to pressure the local mining company to pay their taxes, or the local manufacturing plant. But how do you tax a company that can put its servers, its lawyers, and its intangibles anywhere it wants? How do you tax the Anywhere companies?
Until now, the answer was: “wherever the headquarters is”. But what if there’s no headquarters anymore?
Remote work is inexorable. Before now, the headquarters were defined as wherever the main office was and that was where a company had its leadership and the most white-collar employees.
What if companies don’t have a headquarters anymore, and go fully remote, like Automattic (the maker of WordPress.com), Invision, GitLab, Gumroad, Twitter, Square, Quora, Notion, Zapier, Coinbase, Basecamp, Fujitsu, Hims, Shopify, Dropbox, Skillshare, Spotify, Stripe, Hubspot, Coda, Figma, Trello, Upwork, VMWare, Box, Affirm, Okta, CrowdStrike, Reddit, Docker, Atlassian, Coinbase, Snowflake and REI?
Sure, as we go back to a certain post-COVID normality, many people will go back to the office. But only a few white-collar jobs will be fully office based, while the vast majority will be hybrid.
I estimate that between 10% and 25% of all U.S. jobs will be fully remote after the pandemic, and I believe that will keep going up. Evidently, fully-remote companies can decide to put their headquarters wherever they want. The more they grow, the more they will avoid taxes.
And that’s corporate taxes. What about individual income taxes?
If Musk can pack up and leave for Texas despite leading not one, but two very industrial companies, what do you think all the remote workers will do? Those who can work from a café on the Lisbon beach and pay a flat 20% income tax? Do you think they will stay around in high-tax jurisdictions in the long term?
And as corporations and founders and workers start optimizing for their taxes, how do you think countries will react?
Already, digital nomad visas have been approved in countries like Costa Rica, Georgia, Dubai, Cayman Islands, Bermuda, Antigua y Barbuda, Mexico, Australia, Thailand, Germany, Czech Republic, Portugal, Norway, Estonia and Croatia.
These same countries have started offering lower tax rates to compete for the same remote workers, with a 24% flat income tax for newcomers in Spain, 20% in Portugal, a maximum of 22.5% in Greece, between 5% and 12% in Italy, and no local taxes in Croatia. These are countries that usually have top marginal tax rates close to 50%.
And of course, as an American, the one place in the world where you can reduce your federal income taxes is Puerto Rico, where you could pay as little as 4% in income tax and 0% in capital gains incurred while living there.
To be clear, this is a good thing, for them and for remote workers. These countries are just understanding these dynamics earlier than anybody and adapting to the new world before everybody else because people are less mobile than companies, but they are mobile, too. The same way tax havens lower taxes for all corporations by competing for corporate tax income, so will countries keep lowering their taxes to compete with remote workers.
The way they do this today is by keeping a high taxation rate for locals while luring in people living abroad, so as not to drop their current tax income. But you can imagine that as more people do this, these incentives will become more long term. Spain is already proposing to extend the tax benefits of remote workers from six to 10 years.
So as companies and people become more mobile, they will keep shopping around for the best tax deal, lowering overall taxes. That is, when they even pay taxes.
The more that blockchains power the economy, the harder it will be for nation-state governments to track all of these money movements, and the harder it will be for them to tax these movements.
Today, the way governments do it is by regulating local banks, by getting direct data feeds from them, by intervening the international money flows through the SWIFT system, by freezing assets… But how do you do that in a world where all exchanges are decentralized?
This is why the U.S. government freaked out about cryptocurrencies and tried to force every crypto player to report everything. It’s why when El Salvador announced bitcoin would be legal tender, the World Bank refused to help and the International Monetary Fund warned of dire consequences — both of these organisms are controlled by nation states, particularly the U.S.
The nation state fears the loss of its grip on the financial system, without which it’s much harder to force the tax payments it needs. But that trend is imparable.
And if you think nation states will reduce international tax avoidance, ask yourself: are politicians interested in closing these loopholes?
Politicians are the first to take advantage of these rules. They will never close the loopholes.
Limited Fiat Printing
Of course, at the same time, it’s harder to finance yourself by printing money when people don’t use your money.
Countries like Weimar Germany, Venezuela, Argentina and Zimbabwe know well what happens when you print too much money: dramatic inflation and dollarification — people escape from the local currency and start using dollars instead.
Since 2009, however, governments like in the U.S. and the EU discovered that they could print money without dramatic penalties. So they started pumping the printing press.
It took 96 years for the Federal Reserve to print $1 trillion, but six years to reach $4 trillion (after 2009). Since the beginning of the pandemic, the money supply has doubled. But this time, it wasn’t without consequences.
And you have to realize this is the government printing the money and the government telling you the inflation rate. If the normal escape from local inflation is the dollar, where do you escape from the dollar?
This is one of the key reasons why the stock market has been doing so well in the middle of a pandemic. But stocks aren’t a perfect alternative. Cryptocurrencies are, because they’re not denominated in dollars.
The more of the economy that happens through cryptocurrencies, the less the government will be able to rely on the printing press to fund itself.
All of this, of course, is happening at the time when the governments will break under the weight of pensions they can’t pay from taxing workers that don’t exist.
The Demographic Ticking Bomb
All of this is happening while at the same time we’re having fewer kids.
But — thankfully — we’re living much longer.
Unfortunately, most nation-state governments are incapable of raising the retirement age accordingly. As a result, workers must support ever more retirees.
This graph means that a retiree in the 1980s in developed countries like Japan, China and the European Union had more than five workers to pay for her old-age benefits like healthcare and pensions. In Japan, every retiree only has two workers to support her. Europe will get there in 10 to 20 years. The U.S. will follow soon after.
Already today, over 20% of European governments’ spending is dedicated to old-age benefits. If that doubles, how much money will be left? Especially since a big chunk of government income must be spent to service the debt — to pay back all of these bonds we happily buy at “risk zero.”
Meanwhile, the debt keeps piling up in the developed world.
Governments in developed countries are more in debt today than after WWII.
This is the Congressional Budget Office’s (CBO) projection of U.S. federal government debt:
According to the CBO, in 10 years the U.S. federal government will spend half of its discretionary budget on those aged 65 and older.
So, just to summarize here:
- Nation states with developed economies won’t be able to fund themselves as they’ll have a hard time taxing corporations and individuals because of the internet, remote work and blockchains.
- At the same time, they will have a harder time printing money because of cryptocurrencies
- They won’t be able to emit debt forever either, because their debt is already through the roof. Servicing it will cost more and more.
- This happens just as their costs increase because their population is aging
Instead of doing what they should — realizing they overpromised and correcting accordingly by raising the retirement age — they try to control their technological foes: social media, multinational corporations, mobile individuals, blockchain technologies…
We know how this ends. It happened five centuries ago, when the Catholic Church tried to suppress the printing press instead of reforming itself. It failed because it couldn’t stop the avalanche of technological progress. Within decades of the invention of the printing press, it had splintered, never to return to its glory days again.
For nation states moving forward, there are only two paths. The first one is totalitarianism. They can do like China, split from the rest of the world, and control everything that happens internally, at the cost of destroying development and erasing individual freedom.
The other alternative is choosing freedom, which means competition between many of the 195 countries that exist today, the extreme difficulty of collusion between them, and the unavoidable result of the demise of the nation state.
The only question left is: What will replace nation states? I will cover this in upcoming articles. Subscribe now to receive them.
This is a guest post by Tomas Pueyo. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.bonds pandemic covid-19 stocks cryptocurrency bitcoin ethereum blockchain crypto btc currencies crypto gold
SocGen Is Telling Its Nervous Clients “Don’t Leave The Party Yet” – Here’s Why
SocGen Is Telling Its Nervous Clients "Don’t Leave The Party Yet" – Here’s Why
A surge in cross-asset volatility over the past two weeks has left investors with many questions about its nature and implications and whether it is safe to buy…
A surge in cross-asset volatility over the past two weeks has left investors with many questions about its nature and implications and whether it is safe to buy the dip (technically there is no longer a dip).
In a note seeking to ease client concerns, SocGen strategists Jitesh Kumar and Alain Bokobza say "don’t leave the party yet" because they found that the main trigger for the recent market turmoil has been "investors seeking to deleverage their more illiquid/expensive assets to protect profits as the year ends." And while the market may be shaken by residual liquidity tremors over the next couple of weeks, "recent trends nevertheless underpin our recommendation to remain invested and stay overweight in equities, real assets (including commodities), and the dollar."
Drilling down on the increasingly nervous market since the Fed’s recent hawkish turn and the move higher in rates since the September FOMC meeting, SocGen points to several other catalysts that have kept investors on their toes, including:
collateral scarcity in Europe, fueling very high demand for ‘safe’ assets, wider asset swap spreads and a wider cross-currency basis swaps due to a drop in ECB net issuance;
the threat of COVID Delta-variant related lockdowns in Europe (Austria, Germany) even before the emergence of Omicron;
the 6%+ CPI print in the US, followed by the re-nomination of Jerome Powell at the Fed, enabling him to signal scope for a faster taper and earlier rate hikes, stoking policy error fears;
credit spread widening against plummeting German bond yields, while corporate bond issuance has remained robust; and
high pension funding ratios fueling demand for ‘safer’ assets (bonds) to rotate into.
One read of the above is that these combined pressures have increased demand for bonds, while Omicron spooked some investors into cutting over-extended positions on the Friday following Thanksgiving amid low market liquidity. These pressures triggered very sharp moves in some widely owned illiquid assets, including:
rotation from high beta stocks into quality stocks;
a shift in preference to US equities/large cap tech from small caps/other overseas investments;
increased hedging to lock in gains before year-end, triggering higher equity/credit volatility;
a sharp rise in funding currencies at the expense of high yielders/EM, leading to a weaker dollar.
Additionally, as the SocGen duo notes, some highly extended inflation plays have been among the most impacted, e.g. both crude oil and breakeven inflation linkers saw substantial one-day drops on 26 November as shown below (the French bank is quick to note that it remains overweight on both commodities and inflation-linked bonds as they provide protection against higher inflation prints and a Fed tightening cycle over 2022).
The market turbulence also took an already extended VIX complex up to the highest levels since the March 2020 crash. So illiquid was the market that the VIX bid/offer spread exploded to 4 vol points, but here too SocGen thinks the Left Tail risks are in fact a manifestation of a lack of liquidity in downside hedges
But how does the sharp risk off episode square with dollar weakness - after all the dollar usually surges when there is a dump in risk.
According to SocGen, dollar weakness coinciding with broader market weakness "was unusual but makes sense when seen through the deleveraging lens." The chart below left shows that during the turmoil on 26 November, the typical funding currencies (EUR, JPY, CHF) strengthened while EM currencies (most of which are high yielders) weakened. This had the overall effect of weakening the broad dollar, especially in the G10 space. However, this trend is expected to reverse and take us back to a strong dollar environment given that we see a full Fed hiking cycle ahead of us (unless of course Omicron or whatever variant comes next ruins these plans).
Looking at actual stock positions, SG’s derivatives team notes that options positioning on US small caps had been increasing throughout October. Therefore, it says, "the risk-off episode came at an inopportune moment for some well invested market participants, who likely had to reduce risk in US small caps faster than they would have preferred." As can be seen in the chart above right, Russell 2000 index turnover in the cash market was overwhelmed by the futures market on 26 November, triggering large intraday moves.
Separately, SocGen also points to the combined position changes visible in the CFTC data for hedge funds and asset managers which it says provides further evidence of the pressure on Russell 2000 futures, which in aggregate saw $5.4bn in selling in the holiday-curtailed last week of November (23-30 Nov data). This was the largest weekly sale of Russell 2000 futures as per CFTC data in more than four years.
In contrast to small caps, positioning on large cap equities has not been under the same pressure. Asset manager + hedge fund flows in S&P500 e-mini futures totalled -$6.4bn in the last available dataset, a relatively small amount for the S&P500. More tellingly, the overall flow on the Nasdaq 100 was slightly positive over this period at +$0.8bn, as shown in the right-hand chart above.
Generally speaking, short-term repo is also a useful indicator of the demand/supply profile of major equity indices. A sharply negative repo rate usually signifies very high demand for balance sheet exposure relative to supply, while a very positive repo rate signifies risk aversion. The chart below shows the 1-month repo rate on S&P500, while the balance sheet pressures faced by banks during the fourth quarter of every year are well known. That said, the current quarter, despite recent weakness in broad equities, has not seen positive repo levels, indicating that US large caps have not been hit by material drawdowns according to SocGen (and their price).
So what should traders do?
In a word, nothing, at least that's the recommendation of SocGen. The bank continues to believe that tightening spells are flattening, and thus recommend being positioned for a flattening of the yield curve, which also supports US stocks that are longer-duration assets and are tilted toward quality. In terms of sectors, long Information & Technology against the financial sector is very well correlated with the trend in the yield curve and is one of our key sector calls linked to the Fed tightening cycle.
Sure enough, the curve has not only flattened at the very long end, but market pricing of the total number of hikes from the Fed over the next few years has also reduced. Hikes previously priced for 2024 and 2025 have all been brought forward to 2023, as the chart below shows. Indeed, as we first showed a week ago, the market is now pricing a small probability of a rate cut in 2025.
One take on these moves is that i) either inflation is not going to be a longer-term problem, and that longer-duration assets should therefore continue to do well, or ii) inflation will be a problem but the Fed will be powerless to do anything about it without blowing up the entire market in the process. Our money is on the latter.
Last but not least, SocGen continues to see support for broader financial markets going into next year as private-sector balance sheets remain strong. To wit, US corporates hold close to $7 trillion in liquid assets and US households have $17 trillion tucked away in deposit and money market funds post the pandemic (then again most of this cash belongs to the 1% with few benefits trickling down to the lower 90%). In short, the French bank believes that there is still plenty of cash on the sidelines and investors will sooner or later need to move away from cash in a 6%+ inflation environment.
In conclusion, SocGen's remains alert to the risks that would flare up in the event of more hawkish central banks as well new COVID variants, but for now it recommends its playbook for 2022, "which is working well so far."
BoJo Unveils “Plan B” Restrictions To Fight Omicron As New Cases Double Every 2-3 Days
BoJo Unveils “Plan B” Restrictions To Fight Omicron As New Cases Double Every 2-3 Days
Update (0800ET): More details about BoJo’s "Plan B" are coming into focus. The plan could be announced as early as Wednesday evening, or possibly…
Update (0800ET): More details about BoJo's "Plan B" are coming into focus. The plan could be announced as early as Wednesday evening, or possibly Thursday. According to the BBC, the UK cabinet is meeting at 15:45GMT and has scheduled a press conference for 17:30GMT on Plan B.
As of now, the UK government is reportedly drawing up plans that will include a Christmas work from home order as PM Johnson considers measures to slow the spread of the Omicron variant. The measures are expected to include the introduction of vaccine passports to slow the spread of Omicron, along with a renewed work-from-home guidance, vaccine passports for nightclubs, alongside guidance on indoor and outdoor events.
Elsewhere in Europe, Norway's Prime Minister said they must install more restrictions to control the spread of COVID but must avoid a full lockdown of society. The PM added that there should be no more than 10 visitors in private homes, while bars and restaurants must stop serving alcohol from midnight every day. The government will introduce new economic compensations for companies hit by COVID restrictions.
* * *
Since the start of the pandemic, we have cautioned readers to look past what political leaders are saying about lockdowns and vaccine mandates intended to "keep us safe", and focus more on ulterior motives, like pushing the Fed to monetize mountains of debt to keep the market-sustaining money tap open. Like with every other major decision, it's important to ask oneself: Cui bono - who benefits?
With that in mind, UK PM Boris Johnson is facing bitter criticism from Britons after he allegedly rushed the announcement of England's "Plan B" - BoJo's more restrictive version of President Biden's "winter plan" - allegedly to try and distract from a national scandal caused by leaked footage of a 10 Downing Street Christmas Party held last winter, when holiday parties were expressly forbidden by COVID lockdown rules.
The FT, which broke the news of BoJo's "Plan B" plans, described the impending announcement as a "dead cat" - that is, something done to draw attention away from a much bigger scandal.
One said the move to Plan B — much earlier than expected — was a “dead cat” move by Johnson to distract attention from the furore over a leaked video of a mock Downing Street press conference showing staff laughing about the party, which breached Covid-19 rules.
The new restrictions - intended to try and stop the spread of omicron - are expected to be announced at a press conference as early as Wednesday, with the new measures put before parliament on Thursday.
Still, according to the UK's top COVID scientists, the new lockdowns couldn't come soon enough, as cases of the omicron variant are believed to be doubling "every two to three days." Neil Ferguson, one of the UK's leading coronavirus experts, warned on Wednesday that if no further measures were introduced, the peak of the current wave of infection would likely arrive in January, and that new infections caused by omicron could potentially overtake delta by Christmas. Whether that actually happens remains to be seen.
But word of BoJo's rush to impose "Plan B" in England has rattled markets in the UK by stoking fears that more omicron lockdowns would be announced in the UK, and elsewhere in Europe. The plan includes requiring vaccine passports to enter large buildings, along with an order to work from home.
British travel and leisure stocks tumbled Wednesday on the news, with Wizz, EasyJet, IAG all down about 4%. Restaurant Group dropped as much as 6.2%, while Cineworld shed 5.6%; the two companies were the worst performers on the All-Shares Index. Gilts, the UK's government bonds, rallied on the news, sending yields down 3 basis points to outperform German bunds. It's expected that "Plan B" will extend requirements for vaccine passports for travelers, and potentially cause up to £18 billion ($23.75 billion) in economic damage, according to documents seen by the Guardian.
In the face of a national uproar caused by the Christmas Party revelations, UK health secretary Sajid Javid pulled out of a number of national broadcast interviews that had been scheduled for Wednesday after a video showing BoJo's top aides holding a mock press conference where they joked about the Christmas Party (which they later denied happened).
Javid had been expected to discuss the UK’s vaccination efforts on the BBC and Sky News, as well as a number of radio stations, delivering an update on the one-year anniversary of the first jab being given in Britain.
Adding to the sting from the news of the Downing Street Christmas Party, ITV also published this video from a mock press conference featuring staffers joking about the Christmas Party, which they later denied happened.
It's an early Christmas present for the opposition...and any European leaders who are tired of BoJo's brusque negotiating style.
Futures Jump In Volatile Session Dragged By Latest Twists In Omicron Saga
Futures Jump In Volatile Session Dragged By Latest Twists In Omicron Saga
Much of the overnight session was a snooze fest with stocks drifting first higher then lower after surging on Tuesday, as the narrative meandered from "omicron fears…
Much of the overnight session was a snooze fest with stocks drifting first higher then lower after surging on Tuesday, as the narrative meandered from "omicron fears ease" optimism to "vaccines won't work" pessimism, before futures took a sudden leg lower, dropping into the red just after 530am ET, following news that UK's Boris Johnson would introduce new restrictions in England to curb Omicron spread, sparking fears that Omicron is more dangerous that expected (and than futures reflected). However, this episode of pessimism proved short-lived because just an hour later, the WSJ confirmed that Omicron is really just a pitch for covid booster shots when it reported that even though the covid vaccine loses significant effectiveness against Omicron in an early study, this is miraculously reversed with a booster shot as three doses of the vaccine were able to neutralize the variant in an initial laboratory study, and the companies said two doses may still protect against severe disease.
Futures quickly shot up on the news, spiking above the gamma "all clear" level of 4,700 in a move best summarized with the following chart.
And so, after going nowhere, S&P futures climbed for a third day, last seen 12 points, or 0.3% higher, just around 4,700 after rising the most since March on Tuesday. Europe’s Stoxx 600 Index rose following the biggest jump in more than a year. In addition to the omicron soap opera, which as we noted yesterday turns out was just one staged covid booster shot advertisement (because Pfizer and Moderna can always do with a bigger yacth), sentiment was also lifted by Chinese authorities' reversal to "easing mode" and aggressive efforts to limit the fallout from property market woes which lifted risk assets in Asia even as key debt deadlines at China Evergrande Group and Kaisa Group Holdings Ltd. passed without any sign of payment.
"Clearly in the very short term uncertainty has risen over the Omicron virus... but overall at this stage we do not believe it will derail the macro picture in the medium-term," said Jeremy Gatto, multi-asset portfolio manager at Unigestion.
Treasury yields were little changed after rising across the curve Tuesday. The VIX spiked first on the FT news, then dropped back into the red, while the dollar was flat and crude rose after turning red.
Besides macro, micro was also in play and here are some other notable premarket movers
- Apple (AAPL US) ticks 1% higher in premarket trading following a Nikkei report that the tech giant told suppliers to speed up iPhone output for Nov.-Jan, citing people it didn’t identify.
- Amazon.com (AMZN US) shares in focus after an Amazon Web Services outage is wreaking havoc on the e-commerce giant’s delivery operation
- Stitch Fix (SFIX US) tumbles 25% in U.S. premarket trading after a 2Q forecast miss that analysts called “surprising,” while customer additions also disappointed
- Pfizer (PFE US) shares drop 2% in U.S. premarket trading after an early study showed that the company’s vaccine provides less immunity to the omicron variant
- Dare Bioscience (DARE US) soars 41% in premarket trading after Xaciato gets FDA approval for treating bacterial vaginosis
- EPAM Systems (EPAM US) soars 8% in premarket after S&P Dow Jones Indices said co. will replace Kansas City Southern in the S&P 500 effective prior to the opening of trading on Dec. 14
- Goodyear Tire & Rubber (GT US) upgraded to buy from hold and target boosted to Street-high $32 from $29 at Deutsche Bank with the company seen as a major beneficiary from the shift to electric vehicles. Shares up 4.3% in premarket trading
- NXP Semiconductor (NXPI US) shares slide 2.2% in U.S. premarket trading after the chipmaker got a new sell rating at UBS
- Dave & Buster’s (PLAY US) gained 3.5% postmarket after the dining and entertainment company reported EPS that beat the average analyst estimate and authorized a $100 million share buyback program
"Every day that passes without a wave of severe cases driven by Omicron is offering more hope that this won't be the curveball to throw the recovery off course," wrote Deutsche Bank strategist Jim Reid in a note to clients.
In Europe, the Stoxx Europe 600 Index initially drifted both higher and lower then bounced 0.3% on the favorable Pfizer and BioNTech news one day after posting its bigger surge in a year. European benchmark index earlier rose as much as 2%, dropped 2.1%. Health care sub-index leads gains, rising 1.2%, followed by travel stocks. The Stoxx 600 closed 2.5% higher on Tuesday, biggest gain since November 2020
Earlier in the session, Asia stocks also rose for a second day as concerns about the omicron variant and China’s economic slowdown eased. The MSCI AsiaPacific Index climbed as much as 0.9% after capping its biggest one-day gain in more than three months on Tuesday. Technology and health-care shares provided the biggest boosts. Benchmarks in New Zealand and India -- where the central bank held rates at a record low -- were among the day’s best performers.
“The biggest point appealing to investors is that the Omicron variant doesn’t seem to be too fatal,” which is encouraging to those who had been going short to close out their positions, said Tomoichiro Kubota, a senior market analyst at Matsui Securities in Tokyo. “Worry that the Chinese economy will lose its growth momentum has subsided quite a bit.” Thus far, Omicron cases haven’t overwhelmed hospitals while vaccine developments indicate some promise in dealing with the variant. While vaccines like the one made by Pfizer and BioNTech SE may be less powerful against the new strain, protection can be fortified with boosters. The two-day rally in the Asian stock benchmark marks a sharp turnaround following weeks of declines since mid-November. Stocks in China also climbed for a second day. The nation’s central bank said Monday it will cut the amount of cash most banks must keep in reserve from Dec. 15, providing a liquidity boost and helping restore investor confidence
In FX, news on the Omicron variant rippled through G-10 currencies after a report the Pfizer vaccine could neutralize the Omicron variant boosted risk appetite. The pound underperformed other Group-of-10 peers, extending declines after reports that the U.K. government is poised to introduce new Covid-19 restrictions. A gauge of the dollar’s strength fluctuated as Treasuries pare gains and stocks rally after a report that said Pfizer and BioNTech claim three vaccine doses neutralize the omicron variant. EUR/USD rose 0.1% to 1.1277; USD/NOK falls as much as 0.8% to 8.9459, lowest since Nov. 25
Sterling fell against the euro and the dollar, as traders pare bets on the path of Bank of England rate hikes following reports that the U.K. could introduce fresh Covid-19 restrictions such as working from home and vaccine passports for large venues. Money markets pare rate hike bets, with just six basis points of interest rate hikes priced in for the BOE meeting next week. GBP/USD falls as much as 0.6% to 1.3163, testing the key level of 1.3165, the 38.2% Fibonacci retracement of gains since March 2020. EUR/GBP gains as much as 0.7% to 0.85695, the highest since Nov. 11.
“The market will probably see this as more U.K. specific and therefore an issue for the pound at least in the short term,” said Stuart Bennett, FX strategist at Santander.
In rates, Treasuries were mixed with markets reacting in a risk-on manner to the Dow Jones report that Pfizer and BioNTech claim three vaccine doses neutralize the omicron variant. Yields remain richer by less than 1bp across long-end of the curve while front-end trades cheaper on the day, flattening curve spreads. Session’s focal points include $36b 10-year note reopening at 1pm ET, following Tuesday’s strong 3-year note auction. Treasury 10-year yields around 1.475%, near flat on the day; gilts outperform slightly after Financial Times report that further Covid restrictions will be announced imminently to curb the variant’s spread. U.S. 2-year yields were cheaper by 1bp on the day, rose to new 2021 high following Pfizer vaccine report; 2s10s spread erased a flattening move
In commodities, crude futures turned red, WTI falling 0.8%, popping back below $72. Spot gold holds Asia’s modest gains, adding $8 to trade near $1,792/oz.
Looking at the day ahead, and Olaf Scholz is expected to become German Chancellor in a Bundestag vote today. From central banks, the Bank of Canada will be deciding on rates, and we’ll also hear from ECB President Lagarde, Vice President de Guindos and the ECB’s Schnabel. Finally, data releases include the JOLTS job openings from the US for October.
- S&P 500 futures up 0.2% to 4,693.75
- STOXX Europe 600 little changed at 480.55
- MXAP up 0.7% to 194.84
- MXAPJ up 0.6% to 632.78
- Nikkei up 1.4% to 28,860.62
- Topix up 0.6% to 2,002.24
- Hang Seng Index little changed at 23,996.87
- Shanghai Composite up 1.2% to 3,637.57
- Sensex up 1.8% to 58,654.25
- Australia S&P/ASX 200 up 1.3% to 7,405.45
- Kospi up 0.3% to 3,001.80
- Brent Futures down 0.5% to $75.04/bbl
- Gold spot up 0.3% to $1,790.33
- U.S. Dollar Index down 0.17% to 96.20
- German 10Y yield little changed at -0.38%
- Euro up 0.2% to $1.1286
- Brent Futures down 0.5% to $75.04/bbl
Top Overnight News from Bloomberg
- The omicron variant of Covid-19 must inflict significant damage on the euro-area economy for European Central Bank Governing Council member Martins Kazaks to back additional stimulus
- “The current phase of higher inflation could last longer than expected only some months ago,” ECB vice president Luis de Guindos says at event
- The earliest studies on omicron are in and the glimpse they’re providing is cautiously optimistic: while vaccines like the one made by Pfizer Inc. and BioNTech SE may be less powerful against the new variant, protection can be fortified with boosters
- U.K. Prime Minister Boris Johnson is set to announce new Covid-19 restrictions in England, known as “Plan B,” to stop the spread of the Omicron variant, the Financial Times reported, citing three senior Whitehall officials familiar with the matter.
- French economic activity will continue to rise in December, despite another wave of the Covid-19 pandemic and fresh uncertainty over the omicron variant, according the Bank of France
- The Kingdom of Denmark will sell a sovereign green bond for the first time next month to help the Nordic nation meet one of the world’s most ambitious climate targets
- Tom Hayes, the former UBS Group AG and Citigroup Inc. trader who became the face of the sprawling Libor scandal, has lost his bid to appeal his U.K. criminal conviction
- Poland is poised for a hefty increase in interest rates after a spike in inflation to a two- decade high convinced central bankers that spiraling price growth isn’t transitory. Of 32 economists surveyed by Bloomberg, 20 expect a 50 basis-point hike to 1.75% today and 10 see the rate rising to 2%. The other two expect a 25 basis-point increase
- Australia is weighing plans for a central bank-issued digital currency alongside the regulation of the crypto market as it seeks to overhaul how the nation’s consumers and businesses pay for goods and services
- Bank of Japan Deputy Governor Masayoshi Amamiya dropped a strong hint that big firms are in less need of funding support, a comment that will likely fuel speculation the BOJ will scale back its pandemic buying of corporate bonds and commercial paper
A detailed summary of global markets courtesy of Newsquawk
Asian equity markets traded positively as the region took impetus from the global risk momentum following the tech-led rally in the US, where Apple shares rose to a record high and amid increased optimism that Omicron could be less dangerous than prior variants. This was after early hospitalisation data from South Africa showed the new variant could result in less severe COVID and NIH's Fauci also suggested that Omicron was 'almost certainly' not more severe than Delta, although there were some slight headwinds in late Wall Street trade after a small study pointed to reduced vaccine efficacy against the new variant. The ASX 200 (+1.3%) was underpinned in which tech led the broad gains across sectors as it found inspiration from the outperformance of big tech stateside, and with energy bolstered by the recent rebound in underlying oil prices. The Nikkei 225 (+1.4%) conformed to the upbeat mood although further advances were capped after USD/JPY eased off the prior day’s highs and following a wider-than-expected contraction to the economy with the final annualised Q3 GDP at -3.6% vs exp. -3.1%. The Hang Seng (+0.1%) and Shanghai Comp. (+1.2%) were less decisive and initially lagged behind their peers as sentiment was mired by default concerns due to the failure by Evergrande to pay bondholders in the lapsed 30-day grace period on two USD-denominated bond payments and with Kaisa Group in a trading halt after missing the deadline for USD 400mln in offshore debt which didn’t bode well for its affiliates. Furthermore, China Aoyuan Property Group received over USD 650mln in repayment demands and warned it may not be able to meet debt obligations, while a subdued Hong Kong debut for Weibo shares which declined around 6% from the offer price added to the glum mood for Hong Kong’s blue-chip tech stocks, as did reports that China is to tighten rules for tech companies seeking foreign funding. Finally, 10yr JGBs languished after spillover selling from T-notes and due to the heightened global risk appetite, but with downside stemmed by support at the key psychological 152.00 level and amid the presence of the BoJ in the market today for over JPY 1.0tln of JGBs.
Top Asian News
- China Clean Car Sales Spike as Consumers Embrace Electric
- Gold Edges Higher as Traders Weigh Vaccine Efficacy, Geopolitics
- Paint Maker Avia Avian Falls in Debut After $763 Million IPO
- Tokyo Prepares to Introduce Same-Sex Partnerships Next Year
Equities in Europe shifted to a lower configuration after a mixed open (Euro Stoxx 50 -0.7%; Stoxx 600 -0.1%) as sentiment was dented by rumours of tightening COVID measures in the UK. Markets have been awaiting the next catalyst to latch onto for direction amidst a lack of fresh fundamentals. US equity futures have also been dented but to a lesser extent, with the YM (-0.1%) and ES (Unch) straddling behind the NQ (+0.2%) and RTY (+0.2%). Sources in recent trade suggested an 85% chance of the UK implementing COVID Plan B, according to Times' Dunn; reports indicate such restrictions could be implemented on Thursday, with the potential for an announcement today. In terms of the timings, the UK cabinet is penciled in for 15:45GMT and presser for 17:30GMT on Plan B, according to BBC's Goodall. Note, this will not be a formal lockdown but more so work-from-home guidance, vaccine passports for nightlife and numerical restrictions on indoor/outdoor gatherings. APAC closed in the green across the board following the tech-led rally in the US. The upside overnight was attributed to a continuation of market optimism after early hospitalisation data from South Africa showed the new variant could result in less severe COVID, albeit after a small study pointed to reduced vaccine efficacy against the new variant. Participants will be closely watching any updates from the vaccine-makers, with the BioNTech CEO stating the drugmaker has data coming Wednesday or Thursday related to the new COVID-19 variant, thus markets will be eyeing a potential update this week ahead of the Pfizer investor call next Friday. Back to European, the UK’s FTSE 100 (Unch) and the Swiss SMI (+0.8%) are largely buoyed by their defensive stocks, with sectors seeing a defensive formation, albeit to a slightly lesser extent vs the open. Healthcare retains its top spot closely followed by Food & Beverages, although Personal & Household Goods and Telecoms have moved down the ranks. On the flip side, Retail, Banks and Travel & Leisure trade at the bottom of the bunch, whilst Tech nursed some earlier losses after opening as the lagging sector. In terms of individual movers, Nestle (+1.8%) is bolstered after announcing a CHF 20bln share repurchase programme alongside a stake reduction in L'Oreal (+1.0%) to 20.1% from 23.3% - worth some EUR 9bln. L’Oreal has shrugged off the stake sale and conforms to the firm sectoral performance across the Personal & Household Goods. Meanwhile, chip names are under pressure after Nikkei sources reported that Apple (+0.8% pre-market) was forced to scale back the total output target for 2021, with iPhone and iPad assembly halted for several days due to supply chain constraints and restrictions on the use of power in China, multiple sources told Nikkei. STMicroelectronics (-1.7%) and Infineon (-5.0%) are among the losers, with the latter also weighed on by a broker downgrade at JPM.
Top European News
- ECB’s Kazaks Sets High Bar for Omicron-Driven Extra Stimulus
- Biden Is Left Guessing Over Putin’s Ultimate Aim in Ukraine
- Byju’s Buys Austria’s GeoGebra to Bolster Online Math Courses
- Scholz Elected by Parliament to Take Charge as German Chancellor
In FX, the Dollar index continues to hold above 96.000, but bounces have become less pronounced and the range so far today is distinctly narrower (96.285-130) in fitting with the generally restrained trade in pairings within the basket and beyond, bar a few exceptions. Price action suggests a relatively muted midweek session unless a major game-changer arrives and Wednesday’s agenda does not bode that well in terms of catalysts aside from JOLTS and the BoC policy meeting before the second leg of this week’s refunding in the form of Usd 36 bn 10 year notes.
- AUD/EUR - Notwithstanding the largely contained currency moves noted above, the Aussie is maintaining bullish momentum on specific factors including strength in iron ore prices and encouraging Chinese data plus PBoC easing that should have a positive knock-on effect for one of its main trading partners even though diplomatic relations between the two nations are increasingly strained. Aud/Usd has also cleared a couple of technical hurdles on the way up to circa 0.7143 and Aud/Nzd is firmer on the 1.0500 handle ahead of the RBA’s latest chart pack release and a speech by Governor Lowe. Elsewhere, the Euro has regained composure after its sub-1.1250 tumble on Tuesday vs the Buck and dip through 0.8500 against the Pound, but still faces psychological resistance at 1.1300 and the 21 DMA that comes in at 1.1317 today, while Eur/Gbp needs to breach the 100 DMA (0.8513) convincingly or close above to confirm a change in direction for the cross from a chart perspective.
- CHF/CAD/JPY/GBP/NZD - All sitting tight in relation to their US counterpart, with the Franc paring some declines between 0.9255-30 parameters and the Loonie straddling 1.2650 in the run up to the aforementioned BoC that is widely seen as a non-event given no new MPR or press conference, not to mention the actual changes in QE and rate guidance last time. Nevertheless, implied volatility is quite high via a 63 pip breakeven for Usd/Cad. Meanwhile, Sterling lost grip of the 1.3200 handle amidst swirling speculation about the UK reverting to plan B and more Tory MPs calling for PM Johnson to resign, the Yen is rotating around 113.50 eyeing broad risk sentiment and US Treasury yields in context of spreads to JGBs, and the Kiwi is lagging after touching 0.6800 awaiting independent impetus from NZ manufacturing sales for Q3.
- SCANDI/EM - The Nok extended its advantage/outperformance against the Sek as Brent rebounded towards Usd 76/brl in early trade and Riksbank’s Jansson retained reservations about flagging a repo rate hike at the end of the forecast horizon, while the Mxn and Rub also initially derived some support from oil with the latter also taking on board latest hawkish talk from the CBR. However, the Cny and Cnh are outpacing their rivals again with some assistance from a firmer PBoC midpoint fix to hit multi-year peaks vs the Usd and probe 6.3500 ahead of option expiry interest at 6.3000 and a Fib retracement at 6.2946, in stark contrast to the Try that is unwinding recent recovery gains with no help from the latest blast from Turkish President Erdogan - see 10.00GMT post in the Headline Feed for more. Conversely, the Czk has taken heed of CNB’s Holub underscoring tightening signals and expectations for the next rate convene and the Pln and Brl are anticipating hikes from the NBP and BCB.
In commodities, crude futures have been hit on the prospect of imminent COVID-related measures in the UK, albeit the measures do not involve lockdowns. Brent and WTI front month futures slipped from European highs to breach APAC lows. The former dipped below USD 74.50/bbl from a USD 76.00/bbl European peak while its WTI counterpart tested USD 71.00/bbl from USD 72.50/bbl at best. Overnight the benchmarks traded on either side the USD 75/bbl mark and just under USD 72/bbl after the weekly Private Inventories printed a larger-than-expected draw (-3.6mln vs exp. -3.1mln), albeit the internals were less bullish. Yesterday also saw the release of the EIA STEO, cut its 2021 world oil demand growth forecast by an insignificant 10k BPD but raised the 2022 metric by 200k BPD – with the IEA and OPEC monthly reports poised to be released next week. On the vaccine front, a small preliminary study of 12 people showed a 40x reduction in neutralization capacity of the Pfizer vaccine against Omicron, but early hospitalisation data from South Africa showed the new variant could result in less severe COVID. BioNTech CEO said they have data coming in on Wednesday or Thursday related to the new Omicron variant. The geopolitical space is also worth keeping on the radar, with US President Biden yesterday warning Russian President Putin that gas exports via Nord Stream 2 will be targeted and more troops will be deployed if he orders an invasion of Ukraine. Further, reports suggested, an Indian army helicopter crashed in Tamil Nadu, with Chief of Defence staff reportedly on board, according to Sputnik. Note, Tamil Nadu is located towards the south of the country and away from conflict zones. Elsewhere spot gold was supported by the overnight pullback in the Dollar, but the recent risk aversion took the yellow metal above the 100 DMA around USD 1,790/oz, with nearby upside levels including the 200 DMA (1,792/oz) and the 50 DMA (1,794/oz). Copper prices meanwhile consolidated within a tight range, with LME copper holding onto a USD 9,500/t handle (just about). Dalian iron ore extended on gains in a continuation of the upside seen in recent trade.
US Event Calendar
- 7am: Dec. MBA Mortgage Applications, prior -7.2%
- 10am: Oct. JOLTs Job Openings, est. 10.5m, prior 10.4m
DB's Jim Reid concludes the overnight wrap
A reminder that we are currently conducting our special 2022 survey. We ask about rates, equities, bond yields and the path of covid in 2022, amongst other things, and also return to a festive question we asked in 2019, namely your favourite ever Christmas songs. The link is here and it’ll be open until tomorrow. All help filling in very much appreciated.
My optimism for life has been shattered this morning. Not from the markets or the virus but just as I woke this morning England cricketers finally surrendered and collapsed in a heap on the first day of the Ashes - one the oldest international rivalries in sport. It was all I could do not to turn round and go back to bed. However out of duty I’m soldering on. After the twins nativity play went without incident yesterday, this morning it’s Maisie’s turn. Given she’s in a wheelchair at the moment she can’t get on stage so they’ve given her a solo singing spot at the start. I’m going so I can bring a bucket for all my wife’s tears as she sings!! If I shed a tear I’ll pretend it’s because of the cricket.
The global market rebound continued to gather strength yesterday as investors became increasingly optimistic that the Omicron variant wouldn’t prove as bad as initially feared. To be honest, it was more the absence of bad news rather than any concrete good news helping to drive sentiment. Late in the US session we did see some headlines suggesting that the Pfizer vaccine may provide some defence against Omicron but also that the new variant does evade some of the immunity produced by this vaccine. This report of the small study (12 people!!) from South Africa lacked substance but you could take positives and negatives from it. More information is clearly needed.
For the markets though, every day that passes without a wave of severe cases driven by Omicron is offering more hope that this won’t be the curveball to throw the recovery off course. Indeed, to get a sense of the scale of the market rebound, both the S&P 500 and the STOXX 600 in Europe have now clocked in their strongest 2-day performances of 2021 so far, with the indices up by +3.27% and +3.76% respectively since the start of the week. Meanwhile, the VIX fell below 25 for the first time in a week.
On the day, the S&P 500 (+2.07%) put in its strongest daily performance since March, whilst the STOXX 600 (+2.45%) saw its strongest daily performance since the news that the Pfizer vaccine was successful in trials back in November 2020. Once again the gains were incredibly broad-based, albeit with cyclical sectors leading the way. The Nasdaq (+3.03%) outperformed the S&P 500 for the first time in a week as tech shares led the rally. Small cap stocks also had a strong day, with the Russell 2000 up +2.28%, on the back of Omicron optimism.
This recovery in risk assets was also seen in the bounceback in oil prices, with Brent crude (+3.23%) and WTI (+3.68%) now both up by more than $5.5/bbl since the start of the week, which puts them well on the way to ending a run of 6 consecutive weekly declines.
For further evidence of this increased optimism, we can also look at the way that investors have been dialling back up their estimates of future rate hikes from the Fed, with yesterday seeing another push in this direction. Before the Omicron news hit, Fed fund futures were fully pricing in an initial hike by the June meeting, but by the close on the Monday after Thanksgiving they’d moved down those odds to just 61% in June, with an initial hike not fully priced until September. Fast forward just over a week however, and we’re now not only back to pricing in a June hike, but the odds of a May hike are standing at +78.8%, which is actually higher than the +66.1% chance priced before the Omicron news hit. A reminder that we’re just a week away now from the Fed’s next decision, where it’s hotly anticipated they could accelerate the pace at which they’ll taper their asset purchases.
With investors bringing forward their bets on monetary tightening, front-end US Treasury yields were hitting post-pandemic highs yesterday, with the 2yr Treasury yield up +5.8bps to 0.69%, a level we haven’t seen since March 2020. Longer-dated yield increases weren’t as large, with the 10yr yield up +3.9bps to 1.47%, and the 5s30s curve flattened another -1.8bps to 54.4bps, just above the post-pandemic low of 53.7bps. Over in Europe there was similarly a rise in most countries’ bond yields, with those on 10yr bunds (+1.4bps), OATs (+1.0bps) and BTPs (+4.4bps) all moving higher, though incidentally, the 5s30s curve in Germany was also down -2.2bps to its own post-pandemic low of 50.0bps.
One pretty big news story that markets have been relatively unperturbed by so far is the rising tensions between the US and Russia over Ukraine. Yesterday saw a video call between US President Biden and Russian President Putin. The US readout from the call did not offer much in the way of concrete details, but if you’re looking for any optimistic news, it said that both sides tasked their teams with following up. Setting the background for the call, there were reports immediately beforehand that the US was considering evacuating their citizens and posturing to stop Nord Stream 2 if Russia invaded Ukraine. The Ruble appreciated +0.42% against the dollar, and is now only slightly weaker versus the dollar on the week.
Overnight in Asia stocks are trading mostly higher led by the Nikkei (+1.49%), CSI (+1.11%), Shanghai Composite (+0.86%) and the KOSPI (+0.78%) as markets respond positively to the Pfizer study mentioned at the top. The Hang Seng (-0.12%) is lagging though. In Japan, the final Q3 GDP contracted -3.6% quarter on quarter annualised against consensus expectations of -3.1% on lower consumer spending than initially estimated. In India, the RBI left the key policy rate unchanged for the ninth consecutive meeting today while underscoring increasing headwinds from the Omicron variant. Futures markets indicate a positive start in the US and Europe with S&P 500 (+0.41%) and DAX (+0.12%) futures trading in the green.
Back on the pandemic, despite the relative benign news on Omicron, rising global case counts mean that the direction of travel is still towards tougher restrictions across a range of countries. In fact here in the UK, we saw the 7-day average of reported cases move above 48,000 for the first time since January. In terms of fresh restrictions, yesterday saw Canada announce that they’d be extending their vaccine mandate, which will now require employees in all federally regulated workplaces to be vaccinated, including road transportation, telecommunications and banking. In Sweden, the government is preparing a bill that would see Covid passes introduced for gyms and restaurants, while Poland put further measures in place, including remote schooling from December 20 until January 9, while vaccines would become mandatory for health workers, teachers and uniformed services from March 1. One move to ease restrictions came in Austria, where it was confirmed shops would be reopening on Monday, albeit only for those vaccinated, while restaurants and hotels would reopen the following week. If you see our daily charts you’ll see that cases in Austria have dropped sharply since the peaks a couple of weeks ago, albeit still high internationally.
In DC, Congressional leaders apparently agreed to a deal that would ultimately lead to the debt ceiling being increased, after some procedural chicanery. Senate Majority Leader McConnell voiced support for the measure, which is a good sign for its ultimate prospects of passing, but it still needs at least 10 Republican votes in the Senate to pass. McConnell indicated the votes would be there when the Senate ultimately takes it up, which is reportedly set to happen this week. The House passed the measure last night. Yields on Treasury bills maturing in December fell following the headlines.
Looking ahead, today will mark the end of an era in Germany, as Olaf Scholz is set to become Chancellor in a Bundestag vote later on, marking an end to Chancellor Merkel’s 16-year tenure. That vote will simply be a formality given the three parties of the incoming coalition (the centre-left SPD, the Greens and the liberal FDP) have a comfortable majority between them, and the new cabinet will feature 7 SPD ministers, 5 Green ministers, and 4 from the FDP. Among the positions will include Green co-leader Robert Habeck as Vice Chancellor, Green co-leader Annalena Baerbock as foreign minister, and FDP leader Christian Lindner as finance minister.
Running through yesterday’s data, the US trade deficit narrowed to $67.1bn in October (vs. $66.8bn expected), marking its smallest level since April. Meanwhile in the Euro Area, the latest Q3 growth estimate was left unchanged at +2.2%, but both Q1 and Q2’s growth was revised up a tenth. Over in Germany, industrial production grew by a stronger-than-expected +2.8% in October (vs. +1.0% expected), with the previous month’s contraction also revised to show a smaller -0.5% decline. In addition, the expectations component of the December ZEW survey fell by less than expected to 29.9 (vs. 25.4 expected), but the current situation measure fell to a 6-month low of -7.4 (vs. 5.7 expected).
To the day ahead now, and Olaf Scholz is expected to become German Chancellor in a Bundestag vote today. From central banks, the Bank of Canada will be deciding on rates, and we’ll also hear from ECB President Lagarde, Vice President de Guindos and the ECB’s Schnabel. Finally, data releases include the JOLTS job openings from the US for October.
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