It turns out the internet can
Stop working, though that’s not the plan
Thus, to be succinct
The people who linked
Their lives to it found nothing ran

Under the heading, ‘It’s amusing today but could be much worse’, it seems there is a downside to all the conveniences we were promised if we just linked all the mundane features of life to the internet so the IoT could work its magic.  When the IoT stops working, so do all those mundane features, like door locks using Ring, and Roomba® vacuums and smart refrigerators and washing machines.  And so, yesterday, when Amazon Web Services crashed for upwards of 9 hours along the East Coast, many people and businesses learned just how reliant they were on a single private company (albeit a big one) for maintaining the status quo of their lives.  Do not be surprised if the question arises as to whether the ‘cloud’ has become too important for the private sector to manage by itself and needs to be regulated as a utility going forward.

With omicron somewhat less feared
The bulls feel the way has been cleared
To add to positions
Which led to conditions
Where price rises were engineered

Markets, however, were completely unconcerned with any hiccups regarding the cloud and bulled ahead with spectacular gains yesterday as the NASDAQ led the way rising more than 3.0%.  While this author’s view is risk appetite is more closely correlated to views on / concerns over the tapering of QE and tighter Fed policy, the narrative has been very focused on omicron and the news that it seems to be more widespread but far less virulent and therefore will have a lesser impact on the recovering economy.  At least, that’s what the punditry is saying this morning as an explanation for yesterday’s massive risk-on rally.

And perhaps, that is an accurate viewpoint.  Perhaps last week’s selloff was entirely due to the uncertainty over just how impactful omicron would be on the global economy.  The problem is that doesn’t pass the smell test.  Consider that if omicron was really going to result in another wave of economic closures, the central bank response would likely be adding still more liquidity to the global system, much of which would find its way into equities.  In contrast, tighter monetary policy that reduces overall liquidity would have the opposite effect.  As such, it seems to me that sharp declines are more likely on fear of less liquidity than fear of the latest virus variant.  So, while markets are still pricing rate hikes for next year, they have clearly come to grips with the current expected pace of those hikes.  Now, if inflation continues to rip higher, and we see the latest CPI print on Friday, the sanguinity over the pace of rate hikes could well disappear.  Remember that there are many ‘fingers of instability’ weaving throughout the market construct, among them massive leverage and extremely high equity valuations.  Risk is a funny thing, it often isn’t a concern until, suddenly, it is the only concern.  Risk asset markets, while continuing to ascend, are also doing so on less and less breadth.  Again, I would contend that hedging remains a critical activity for the corporate set.

Looking around markets today, yesterday’s euphoria, while evident in Asia overnight, has not made its way to Europe.  Japan’s Nikkei (+1.4%) led the way in Asia despite GDP data printing at a much lower than expected -3.6% in Q3.  It seems to me any idea that the BOJ will consider reducing its support for the economy is misplaced.  If anything, I would anticipate increased support as the nation tries to dig itself out of its latest economic hole.  As to the rest of Asia, the Hang Seng (+0.1%) lagged as its tech sector continues to be undermined by Xi’s ongoing crackdown on Chinese tech behemoths, but Shanghai (+1.1%) with far less tech exposure, did fine.

Europe, on the other hand, is under a bit of pressure this morning with the DAX (-0.6%) leading things lower followed by the CAC (-0.3%) while the FTSE 100 is little changed on the day.  The big news in Germany is that Angela Merkel is officially out as Chancellor and Olaf Scholz was sworn in as the new leader of the nation.  I don’t envy his situation as energy prices are rising sharply and Germany is entirely reliant on Russia and Vladimir Putin for the natural gas necessary to stay warm this winter, while their export-led economy is so tightly tied to China’s performance, that the ongoing slowdown there will soften growth prospects.  But then again, as a Social Democrat, maybe that is exactly the position Scholz relishes.

Finally, US markets remain in euphoria mode with futures all pointing higher by another 0.4% at this hour with the S&P 500 less than 1% from its all-time high.

The bond market, this morning, is showing no clarity whatsoever.  Treasury yields, after backing up 5bps yesterday, are actually lower by 0.8bps despite the positive look from equities.  Bunds and OATs are little changed while Gilts (-1.4bps) are showing the most strength.  Perhaps of more interest are the PIGS, where yields are rising sharply (Italy +3.2bps, Greece +4.9bps) after comments from Latvian ECB member, Martin Kazaks, that there was little reason to continue with additional QE once PEPP expires in March.  I suspect the Greeks and Italians would have a different opinion!

Last week, commodity prices were under huge pressure, led by oil, which cratered in the wake of the Thanksgiving holiday.  This morning, WTI (+0.75%) and Brent (+1.0%) are continuing their strong rebound with both grades more than 12% off their recent lows.  NatGas (+3.9%), too, is rebounding but has much further to go to reach the peaks seen in October.  Metals market, on the other hand, are having a less interesting day with gold (+0.1%) and copper (+0.1%) just edging up a bit.

Turning to the dollar, it is broadly, but not universally weaker this morning with NOK (+0.6%) leading the way on the back of oil’s rebound, although the rest of the G10 gainers are far less impressive (AUD +0.2%, CAD +0.1%).  There are some laggards as well with GBP (-0.35%) falling after news that PM Johnson is about to impose new travel restrictions in the country.  Now, if the UK combines tightening monetary policy, at which the BOE has hinted, with omicron inspired restrictions, that is clearly a recipe for slowing growth, and a weaker pound and FTSE.  In fact, the pound has fallen to its lowest level in almost exactly 12 months this morning.  In the EMG space, only TRY (-1.3%) is really falling and that story is consistent.  On the plus side, though is THB (+0.6%), RUB (+0.4%) and ZAR and MXN (both +0.35%) as the commodity sector continues to perform well while Thailand powered ahead on reduced omicron fears.  So, the UK is reacting one way while the Thai government is going in the opposite direction!

On the data front, yesterday’s productivity and labor cost data were even more awful than forecast and Consumer Credit rose far less than anticipated and barely 56% as quickly as September.  This morning brings only the JOLTs report (exp 10469K) which means that with the lack of Fed speakers, the FX market will look elsewhere for drivers. As long as risk remains in vogue, I expect the dollar to remain under some pressure, but if the European equity impulse comes here, look for the dollar to recoup its losses before the day is over.

Good luck and stay safe
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