The latest scare hitting financial markets is the Omicron Variant (or Oh! Macron! Variant in France). While it caused an initial decline in global equity markets {Dow fell 900 points on early reports on Omicron), the Treasury market has been relatively unscathed.
For example, the US Treasury Actives curve dropped last Friday (the orange line represents the Wednesday before Thanksgiving), while the remaining three lines represent last Friday, Monday and Tuesdays (today). In other words, the US Treasury Actives curve has been quiet so far this week after Friday’s flattening.
The US Dollar Swaps curve shows the same dynamics. The dark blue line is last Wednesday, while the remaining lines are last Friday, this Monday and today. Not a lot happening after the initial Omicron fear factor was priced in.
Federal Reserve Chairman Jerome Powell believes that the omicron variant of Covid-19 and a recent uptick in coronavirus cases pose a threat to the U.S. economy and muddle an already-uncertain inflation outlook.
“The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said in remarks he plans to deliver to Senate lawmakers on Tuesday. “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”
Do I detect FEAR in Powell’s voice? The odds of rate increases for next year just fell to one rate increase at the September 2022 meeting.
On the equity side, it seems to be all about whether The Fed will withdraw its support. Back in early 2018, then Fed Chair Janet Yellen and the FOMC started to shrink the Fed balance sheet (green line). This resulted in the “Smart Money Index” declining. The S&P 500 index received a jolt with the Fed stimulus around the COVID outbreak and have taken off like a jackrabbit. Despite the Smart Money Flow index being lower than in 2017.
The VIX and VVIX are elevated showing fear in the equity markets. But much less than when COVID broke out in March 2020. Each spike in VVIX (or the volatility of VIX) is likely when Dr. Anthony Fauci opened his mouth.
So, is Omicron the “planet killer” or just another mild flu-like outbreak? The data is pointing towards the latter, but FEAR may cause it to be a bigger deal than is warranted.
