MARKETS
Despite the surge in sovereign yields, the relative calm in equity markets is a welcome relief for investors who have been shellshocked too many times to count in one of the worst years for stocks and bonds in more than a decade. But something tells me 2022 won't go quietly into the night.
OIL
Oil bulls are getting enamoured by the Biden Administration's backstop bid to replenish SPR and the market's magnetic attraction to the 2023 China growth story.
Though unsaid, it is well understood that policymakers have decided to accept a sizeable Covid wave. And beyond the Covid shift, Chinese policymakers have taken more decisive steps to support the economy while broader macro policy continues to ease.
By all accounts, this should be a good setup for oil markets.
Still, for speculators, the tricky part is trying to time the speed and sequencing of the reopening amid the expectation of multiple Covid waves.
FOREX
Japan is a massive owner of foreign assets, but sidestepping all the repatriation banter, which mostly Tokyo bank desks see first hand. The simple read from real rates and Japanese equities points to USD/JPY sub-130,
THB is supported by a hopeful return to a healthy current account surplus position, helped by the tourism recovery and lower freight costs. Thailand is one of the few markets where growth should be more robust next year than this,
2022 Will Not Go Quietly Into the Night
The underlying trend in US inflation has snapped lower, and the Fed intends to dial things back incrementally, leaving expectations for the terminal rate below 5% come June.
Despite what should be a positive take, we have experienced some very messy price action, and I think 2022 will refuses to submit or yield without significant protest.
If you take a giant step back, the overarching market narrative and the principal macro worry is shifting from inflation to recession.
With that comes a series of significant dollar and US interest rate reversals( see below)
For US equities, receding inflation constraint is very significant; but remember, should the recession narrative take on more weight, S&P 500 is undoubtedly NOT priced for a hard landing.
Taken together, I'm not in love with the risk/reward on US equities from a bull or bear perspective ... the market behaviour in recent weeks only underscores that feeling.
Therefore, since one month CD pays you to wait in cash, I have no problem sitting out a few hands and seeing how the cards fall in early Q1 -- with more attention placed on the shifting dynamics in other macro assets, particularly oil and the China reopening plays via the CSI300 and CNY.
The speculative community is mainly out of their dollar longs and out of their US front-end shorts; those exits were quick and marked a broad shift in conviction from the inflation theme to the slowdown/recession theme.
Remember, rates and the US Dollar are more keen signals of actual economic activity than the stock market.
The trouble has come, as usual, with the bias to be short of S&P 500 (witness price action on the immediate break of CPI ... a sharp 3% squeeze forced the covering of some underwater shorts, only to see the market fall back hard after that).
Into slowdowns, the first order is to buy bonds (over shorting stocks), And into recoveries, the first order is to buy stocks (over shorting bonds). While this is an oversimplification and not necessarily where we're headed, it's a maxim that would have spared lots of tactical pain in past cycles (including the past month).
Despite the recent Oil battle, around Brent $80 per barrel, Covid waves in China will ebb, Russian Oil supply will retreat, and there is no escaping from the structural thesis; multiple years of underinvestment means, from a fundamental perspective, oil price drops in 2023 are limited.
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