Animal Spirits And Gunslingers

Retail bought the dip. Or at least according to data from Vanda Research.

Conditioned over a decade to hunt for ostensible “bargains” at the first sign of weakness, retail investors poured billions into equities during the Black Friday selloff, the firm said. “Animal spirits are clearly still alive in this cohort of investors,” co-founder Eric Liu remarked.

Of course, retail dip-buying is just the “dumb” money version of vol-selling. In either case, it’s the same Pavlovian response function. And Monday’s rally in US shares will only reinforce the classical conditioning.

The rebound on Wall Street negated a chunk of Friday’s rout, pushing the S&P back into positive territory for November. Considering the sheer amount of ambiguity around the new variant, I hesitate to spend an inordinate amount of time documenting the bounce. It could be over by the time the cash session gets going on Tuesday. Or it could gather steam overnight. We can’t know what we don’t know. (Oh, how I love tautologies.)

Read more: Goldman On Omicron: ‘The Range Of Outcomes Remains Unusually Wide’

Plainly, the knee-jerk reaction to the initial Omicron headlines was overdone and exacerbated by illiquid holiday markets. Just as it was a mistake to read too much into Wall Street’s “Red Friday,” so too would it be dangerous to spill too much digital ink on the ensuing unwind of what SocGen’s Kit Juckes suggested was a ludicrous panic attack. “Some of Friday’s madness has been reversed, but only part of it,” he said. “That seems reasonable. Uncertainty is even higher than it was before.”

Joe Biden on Monday suggested additional travel restrictions are unlikely. The same for lockdowns. The US “can deal” with the variant, he said. Needless to say, lockdowns are a political flashpoint. The Biden administration probably isn’t keen on stirring that particular hornet’s nest with the midterms on the horizon.

I’d be remiss not to note big-tech’s outperformance. The Nasdaq 100 bested small-caps by ~200bps on the session.

The simple figure (above) doesn’t exactly scream “confidence” with regard to the virus.

Although Treasurys gave back some of Friday’s monumental rally, the reversal was hardly what one might call “convincing.” As usual, BMO’s Ian Lyngen and Ben Jeffery captured it well in a characteristically incisive daily wrap.

“Treasurys were ostensibly weaker on Monday, although we’ll argue that the most relevant comparison is versus last Wednesday’s closing levels — in which case US rates remain remarkably well bid owing to the latest leg of the pandemic,” they wrote, adding that  although there “was a compelling argument to be made that Friday’s flight-to-quality was simply an overreaction exaggerated by low liquidity… had it been entirely a short-covering event, one might have anticipated more than a 2bps increase in two-year yields today.”

The balance of the week promises a deluge of data and although the Omicron scare does render the numbers a bit “stale,” November payrolls in the US still carry quite a bit of weight — especially if wage growth comes in scorching.

If nothing else, the Omicron selloff stirred up a bull market in “shooting from the hip” references.

“Friday’s session was mostly about shooting first and asking questions later,” the above-mentioned Eric Liu said Monday.

“Panic doesn’t disappear overnight,” Wells Fargo’s Chris Harvey wrote, in a note enumerating “10 things (we think) we know” about the variant. “When the market decides to ‘shoot first, aim later,’ the sharp reaction suggests stress levels will take at least 1-2 weeks to decay,” he added. “Even if the catalyst proves to be ephemeral.”

In prepared remarks to Congress, Jerome Powell said “the emergence of the Omicron variant pose[s] downside risks to employment and economic activity and increased uncertainty for inflation.”

He continued: “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.”

And this is a Fed Chair who, we’re told, is prepared to double down (figuratively and literally) on the taper, with an announcement coming in just two weeks. Two-year yields briefly dropped below 0.5% when Powell’s comments crossed.