Omicron, ‘Coal Baron’ Spark Global Selloff

Global equities staged a coordinated selloff Monday as concerns about the spread of the Omicron variant conspired with the apparent demise of the most ambitious US social spending plan in generations to undercut sentiment.

“Stocks Tank on Manchin Shocker, Unstoppable Omicron,” one headline declared. A small reduction in China’s de facto benchmark lending rate underwhelmed.

Shares were weaker in every major market. The Hang Seng dropped near levels last seen in March of 2020. Shares in Tokyo dove more than 2%, as did European stocks, where travel names were under intense pressure.

Mainland shares in China weren’t spared. The CSI 300 dropped 1.5%, while the ChiNext fell 3%. Oil suffered heavy losses, falling more than 5%, before trimming declines. US tech shares, which were in the firing line late last week, looked poised to fall.

The US is now staring at tighter monetary policy and twin growth headwinds from Omicron and a more pronounced fiscal drag. Late Sunday, Goldman cut its outlook for the US economy citing Joe Manchin’s refusal to back Biden’s fiscal plan.

Jen Psaki chided Manchin for “a sudden and inexplicable reversal,” calling his Sunday comments “a breach of his commitments to the president and colleagues in the House and Senate.” Pramila Jayapal said Manchin “betrayed” Biden and the American people.

Ilhan Omar eviscerated Manchin. “West Virginia is 50th in public health, 50th in childcare, 48th in employment [and] support[s] Build Back Better by a 43-point margin,” she said, adding that “this has nothing to do with his constituents. This is about the corruption and the self-interest of a coal baron.”

Alexandria Ocasio-Cortez took the fight straight to Biden. “The fact that Biden has the power to provide student debt relief to millions, had to be forced into extending the eviction moratorium and has yet to aggressively campaign against the filibuster shows us he has more power than he’s using,” she said, imploring The White House to “take off the gloves and govern.”

In case this isn’t obvious, Manchin’s refusal to back the spending plan means Progressives were right all along to hold out on the bipartisan infrastructure package pending assurances on the broader package of social measures. They never trusted Manchin.

Recall that during the standoff around the infrastructure bill, Jayapal folded under pressure from The White House. But Omar didn’t. Neither did Ocasio-Cortez. Both voted against it, as did Rashida Tlaib, Ayanna Pressley and Cori Bush who, after the collapse of Build Back Better on Sunday, told Biden to “fix this.” “Honestly, I’m frustrated with every Democrat who agreed to tie the fate of our most vulnerable communities to the corporatist ego of one Senator,” Bush said. “No one should have backed out of our initial strategy that would have kept Build Back Better alive.”

Not to put too fine a point on it, but the optics for the Biden administration are very bad. To Progressives, he looks inept and gullible, and his economic advisors (not to mention Janet Yellen) repeatedly insisted that the social spending plan would help ameliorate inflation. Even if you don’t buy that argument, it’s moot now. Voters who would’ve benefited from provisions in the legislation (not least of which was the extension of the expanded child tax credit) will be left in the lurch. If inflation remains elevated, they’ll likely blame Biden both for failing to secure his agenda and for not being more vigilant on inflation.

Of course, not all of that criticism will be fair. It never is. That’s part of being president. Some of today’s inflation is about demand, not supply, and that’s in part a function of stimulus Biden already delivered.

“There is no doubt that the supply contribution has increased post-pandemic and is not settling down,” BNY Mellon’s John Velis wrote Monday. “But according the San Francisco Fed, supply factors only add around two-tenths of a percent to the overall top line PCE inflation figure, while demand factors contributed a much higher share to the overall price level increase – currently a whopping 1.2%,” he added, noting that demand effects “have skyrocketed since the spring.”

This is all extremely vexing for investors. Or at least it should be. It materially raises the odds of a Fed policy mistake. If there’s a bright side for stocks, it’s that the Fed’s tightening “cycle” may be DOA.

But you could argue the Fed is now pot committed to tightening. Inflation isn’t going to abate materially by the March FOMC meeting, if it abates at all. If it’s the change in the fiscal impulse that matters, Manchin has unquestionably undermined the prospects for growth in 2022.

For the Biden White House, that’s doubly bad. The Fed has to hike to rein in surging prices. Biden’s poll numbers have deteriorated with rising inflation. But Fed tightening could exacerbate fiscal drag, pushing the economy towards stagflation.

Between all of that and indeterminacy around Omicron, it’s small wonder that risk assets recoiled coming into Christmas week.