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Caution on Omicron Transmission Claims

Investors are in a cautious mood once more, after stock markets bounced back strongly at the start of the week on reports that omicron symptoms are less severe than feared.

While that comes as a relief and will hopefully remain the case as more evidence is gathered, it’s also being reported that it’s far more transmissible than delta, perhaps 4.2 times more. There’s still too much to learn about the variant to make firm conclusions but what we’re seeing is already enough for governments to be imposing new restrictions.

That doesn’t bode well for the economy in the near term, at least, and raises plenty of questions about what the coming months will bring. Light touch restrictions are being imposed and the hope is that boosters will negate the need for anything harsher but that is far from certain.

Then it becomes a question of what we can expect from the monetary and fiscal authorities. Central banks are fighting high inflation as a result of the restrictions from the last 18 months; faced with more measures and higher price pressures, we can’t expect more from them. Public debt has also grown substantially which may also make governments far more reluctant to announce sweeping support measures. Just a couple of many unknowns over the coming months that investors may have to grapple with.

Evergrande and Kaisa in default

Fitch Ratings has officially downgraded Evergrande and Kaisa to restricted default after failing to make an $82.5m coupon payment before the expiration of the grace period and a $400m dollar bond repayment, respectively. The agency is the first to do so but others will now likely follow which will turn attention to the restructuring process after months of eleventh-hour payments.

The markets are remaining remarkably calm to the news as Chinese authorities have stepped in to manage the fallout. From becoming involved in the process to the PBOC cutting the RRR in order to provide extra liquidity for the market, and more, a managed restructuring is now underway. Whether it will be enough, only time will tell. But investors are taking it in their stride.

Oil falls as EIA downgrades demand forecasts

Oil prices are easing on Wednesday after enjoying a strong first half of the week. Sentiment has softened as we move towards the end of the week following a period of relief as data suggested omicron symptoms are less severe than feared. Unfortunately, the latest data suggests it’s far more transmissible through which could still pose a threat.

So much so that countries are exploring new restrictions with the UK government announcing the time has come for “plan B”. These light-touch restrictions are aimed at slowing the spread as booster shots are administered but more significant measures may be warranted, given how fast the new variant is spreading.

The EIA alluded to this when releasing their new forecasts which they acknowledged are subject to “significant revisions” due to the level of uncertainty. Still, the group revised down demand forecasts for this year and next, bringing the market back into balance in the first quarter and seeing Brent average $73 per barrel, then $70 for the full year. Opinions on this naturally vary drastically and, as the group said, it’s likely those forecasts will change repeatedly and significantly over the course of the next year.

Gold eases but remains range-bound

Gold prices are a little lower again on Thursday, although broadly speaking the yellow metal remains range-bound ahead of next week’s Fed meeting. It’s been mostly between $1,760 and $1,810 for the last couple of weeks, with gold one of the few instruments not subject to immense volatility throughout the omicron panic.

One explanation for this may be the uncertainty born not just by the new variant but also the inflation outlook. Once upon a time, it was easy to predict what central banks would do when faced with economic turbulence. That’s because policymakers weren’t also dealing with inflation running at double or triple their targets and on an upward trajectory.

We should learn a lot over the next week, with US inflation data due tomorrow and then the Fed decision next Wednesday. A day later we’ll hear from the ECB, BoE and SNB so we may have a much better grasp of how policymakers could respond if tough restrictions are reimposed. Until then, gold may remain stuck in this range.

Bitcoin could suffer more but enthusiasts won’t be concerned

Bitcoin is back below $50,000 and struggling to get any real traction above as risk appetite cools. It doesn’t bode well for the cryptocurrency in the near term and as we’ve seen so often in the past, corrections can be deep and painful. But as we saw earlier this year, it has the ability to rebound quickly and scale new highs once more. Crypto backers won’t be put off by the latest declines any more than they were in May.

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