![]() ![]() But if markets do not consider how future scenarios might evolve and how weighted scenario-based risk premia should then be priced, multiple sigma events (such as those of late November) will recur. These new future mutations (which have not yet occurred, but which we can reasonably expect) may or may not threaten vaccine efficacy or change transmissibility assumptions. It would be presumptuous to rule out the evolution of pi, rho and sigma in due course, and we may well be back to a new alpha (or equivalent) once omega is passed and the 24 Greek letters (minus those not used) have been ascribed. ![]() After all, omicron will not be the last mutation, and is therefore also unlikely to be the last variant of concern (VOC). Nomenclature aside, we think this illustrates the importance of taking a more dynamic view. Within 24 hours it had become omicron (with the World Health Organization skipping out the fourteenth letter of the Greek alphabet). On the virus, with the discovery of the latest variant by scientists in South Africa, events are moving quickly. Still, the pricing of inflation expectations looks to be getting ahead of itself. We expect an eventual moderation globally in H2, as base effects and supply chain disruptions ease, but to a higher inflation run rate than the past ten-year average. Overall, we think the peak has just been reached for Eurozone inflation, while the US looks stickier in H1 2022. In 2022, the progress on all these variables will influence central bank attempts to roll back pandemic-easing measures. Rental inflation is now starting to rise too. Supply chain disruptions continue, and wages in the lowest-income quartile are still rising quickly in the US as labor market mismatches persist. Since our last quarterly, used-car prices have headed higher in the US, and European natural gas prices remain stubbornly high amid a hydrocarbon transition that might not have planned fully for geopolitical contingencies. These three factors should be viewed alongside (and not in place of) the inflation debate, which rumbles on. Nevertheless, regional volatility is possible and should many of these events turn sour at the same time, that could coalesce into a risk-off tone. Of this third category, only the debt ceiling could give a surprise of truly global significance. Third, we note a myriad of political and geopolitical risks, including the US debt ceiling (again), Article 16 questions between the UK and the EU, and a broad range of flashpoints along the EU’s eastern front, from Polish sovereignty matters, to Belarus geopolitics, Russia-Ukraine tensions and the clash between monetary policy and politics in Turkey. Second, we think most market participants need to reassess their assumptions on Covid. For local governments, land sales have now halved. ![]() After all, for the banks, for every borrower there is a lender. Now, with widespread real estate defaults priced and economic slowdown underway, the question is how contagion might spread to smaller and medium-sized Chinese banks and the local-government sector. In September, we cited the risk of an acceleration in volatility in the China high yield property market. First, is the next chapter in China credit. Heading into 2022, what might markets be missing? We see three topics. Yet in the short term, the process seems incomplete: the size of recent shock declines in global bond yields on news of the omicron variant suggests bond investors are still not positioned where they need to be relative to their liabilities. The US long bond now trades close to the forwards that were priced in January this year. With the first lockdowns in central and northern European countries in mid-November, an aggressive flattening of the Treasury curve and evidence of short covering in longer-maturity tenors, the steepener is arguably no longer the main pain trade. Since then, we think fixed income markets have started to broaden their horizons. We pointed to Harvard and Cornell University psychologists Christopher Chabris and Daniel Simons who showed in their “Invisible gorilla experiment” the role of selective attention, in which humans can cognitively become focused solely on one subject at the expense of noticing and considering others. In September, in our outlook entitled “ Tunnel Vision”, we discussed the fixed income market’s narrow fixation on inflation, the popularity of bear-steepener positions in US Treasuries and the consensus overweight in credit. While 10-year Treasury yields are no higher than ten months ago, if you look more broadly across global fixed income, multiple sigma events are back. Heading into 2022, volatility in global bond markets is rising, with 25bps one-day moves in front-end Eurodollar contracts, a sharp and chaotic rise in USDTRY and China high yield spreads already wider than the levels reached in US high yield in 2008. ![]()
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |