Strategist from large German bank just sent out a note titled
This is just more of the same
It helps reinforce the point that it really isn’t EVER different this time.
MARKETS operate with their own set of rules and as one who USED to live (die) by these same rules where there are hours of boredom and MOMENTS of panic. VOL is where those (still)IN the markets make their $$ but the strategist from German bank made some simple remarks which make sense…
…The global economy has been going through multiple virus waves throughout the year; and market pricing is currently where it is because of COVID not in spite of it. Omicron simply reinforces trends that were unfolding anyway. Consider that the ratio of technology to cyclical stocks has continued its nine-month trend and powered to fresh highs this week (chart 1).
The US yield curve has barely re-steepened, still only a few basis points from inverting and following the sharp inversions we have seen in many EM curves (chart 2).
Consider that the trade-weighted USD has made fresh highs post-omicron as dollar strength has rotated away from the euro to many emerging markets (chart 3).
The simple observation is that the market was never pricing great macro outcomes anyway this year – the “gangbusters” story peaked way back in Q1, and ever since we have been pricing recurring COVID waves, falling trend growth, too much precautionary savings/liquidity, a very late-cycle economy, and inflation for “bad” reasons. That's why real yields have stayed stuck at record negative levels, why central bank terminal rates haven't been able to reprice and the dollar has rallied. Will omicron change the massive sectoral divergence in favour of goods over services consumption causing inflation (chart 4-7)?
Will omicron help fix the fact that the US labour force is now shrinking for the first time in more than seventy years, on top of falling participation (chart 8)?
Will Omicron re-open China to the world and fix supply chains? The answer, we think, is it will make all these things worse…
AND for the banks strategists conclusion for markets,
… from the perspective of market pricing - flattening curves; low r* and real rates; stronger dollar; tech over cycle - it is more of the same, not something different.
The more things change the more they really are / have been the same…