Kamal Lidder's weekly newsletter tells Markets are on the Edge

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Weekly Newsletter
Markets are on the edge
Hello and welcome to our weekly newsletter, where
I talk about what's been going on in investment
markets and what to look out for in the days and
weeks ahead.
In the last week there's probably only one word
that can describe what's been going on and that
is wow! A lot has happened in the last seven days
in investment markets. I'm going to pick through
the bones of that in this newsletter.
Kamal Lidder, LLB Hons Investment Advisor T
604.643.7707 C 604.626.1590 klidder_at_cgf.com
If you recall a week ago the market was more
concerned about Jerome Powell and his second
term as the chair of USA Federal Reserve than
they were about a new wave of Covid particularly
in Europe. Things have changed a lot since then
and the biggest story which swept the feet from
under bond and equity markets was obviously the
announcement of Omicron which is the new Covid
19 variant that has 50 mutations and more than 30
on the spike protein that most vaccines target.
Aarinder Lidder, BA Hons Investment Associate T
604.643.7612 C236.999.3233 alidder_at_cgf.com
The speed at which governments moved to impose
new travel and domestic restrictions was a
result of fears that Omicron could evade the
body's immune system and existing covid
vaccines. The reaction from investment markets
was immediate with bond yields collapsing and
don't forget that means that bond prices rallied
while equity markets slumped as investors rushed
to haven assets. If you look at the 10-year US
treasury yield at that time, it fell below 1.5
which obviously was good news for bond investors,
but it remained above that 1.46 level. This
ensured that the recent uptrend in treasury
yields that we've seen since the summer had
remained intact.
lidderwealth.com
That was a key technical analysis point to keep a
look at and that was as of last Friday. The
price of oil collapsed 12 back below its 200-day
moving average which is a particularly bearish
sign. Bitcoin continued its recent fall and at
one point was 20 below its November high. Most
developed world equity markets fell between 3
and 5 from their recent highs and in some
cases, they were all time highs just two weeks
prior.
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The markets were spooked and that was within the
first 24 hours of the news of Omicron breaking.
Investors were spooked mostly about the economic
impact of a new potential vaccine evading Covid
variant that, no matter what you held in your
investment portfolio last week you would have
taken a blow. The only real exceptions would have
been exposure to gold and government bonds but
even the former ultimately took a hit this
week. Heading into the end of last week the
market was in the grip of fear and based on the
market's reaction you would have thought we were
back in February 2020. It's far too early to say
either way just yet, especially as the scientific
analysis of Omicron has yet to be completed.
Even if we are on the precipice of a March 2020
style event, history gives us a hint about what
might come next. In 2020 central banks hit the
panic buttons and flooded the market with
liquidity via quantitative easing and interest
rate cuts. This ultimately propelled equity
markets to their recent all-time highs.
Following the news about Omicron, money markets
initially pushed back their bets on how soon and
how quickly the USA Federal Reserve for example
will raise interest rate and it was the same for
other central banks.
Moving into this week equity markets attempted a
rebound with bond yields moving higher along with
equity markets. They tried to move on from
Omicron but then Jerome Powell decided to go in
two footed and take the markets legs away again.
In this week's press conference Powell made his
most hawkish comments on monetary policy since
the pandemic began. He stated that it was time
to retire the T word as in transitory which was
his word to describe inflation and that the Fed
would need to act to deter persistent inflation
and taper QE quicker than planned. The timing of
his comments seems quite strange coming just as
the market is trying to assess the potential
impact of Omicron. The US Federal Reserve
admitted that Omicron is not yet baked into its
economic outlooks. We will find out in the
coming weeks and days whether that will likely
change. It means that the net result was that
Omicron combined with a more hawkish pivot from
the Federal Reserve sent equity markets into a
tailspin. The SP 500 is some 3 lower than its
recent high currently sitting around 4582. The
TSX is down around 4 to 20805. In Europe, the
German DAX is down almost 6 from its high two
weeks ago. The US dollar rallied which was bad
news for commodities especially gold. Even
supposed havens except for certain government
bonds were not safe this week. Jerome Powells
comments increase the chance that the current
bout of equity market volatility might turn into
something a bit more worrisome. At the same time
that equity markets have been falling, bond
prices have rallied as investors increase their
bets that Omicron will hit economic growth. The
10-year US treasury yield is down to 1.4 which
effectively ends the uptrend in bond yields that
started in the summer. That is going to be
interesting to see where that goes in the days
and weeks ahead.
Omicron and the Fed pivot has changed the
backdrop, meaning that fear is the overriding
emotion in investment markets right now. Where
we go from here depends a lot on how dangerous
Omicron turns out to be. If the news is
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good news, then expect a positive response from
equity markets. If not and central banks tighten
into a potential slowdown then things could get
ugly. Right now, depending on which indicators
you use, equity markets are looking oversold.
Historically it suggests we are due a bit of a
rebound but we're going to wait to see what
happens. Markets are on the edge with several
equity, bond indices and sector-based equity
indices sitting at key support levels. This is
technical analysis that I'm writing about. It is
a bit like the pandemic itself. Will Omicron
spark a similar move we saw in February 2020,
much depends on what science tells us about the
new variant in the coming days and weeks. If the
news is bad, then things could obviously come
crashing down. If things do come crashing down,
then the Fed and other central banks will likely
need to pivot once again and ironically
investors would probably be quite happy with that
based upon history. If its good news surrounding
Omicron, then it could be the catalyst for the
seasonal Santa rally unless of course the Fed
decides to derail things.
Have a great weekend!
Kamal and Indy Lidder To find our more
information about Lidder Wealth Advisory Group
click on www.lidderwealth.com
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the work of Lidder Wealth, not an official
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information is given as of the date appearing in
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and the author, Lidder Wealth, does not assume
any obligation to update it or to advise on
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included herein has been compiled from sources
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