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Direction Of Travel

Courtesy of ZeroHedge View original post here.

By Jane Foley, Rabobank head of FX strategy

Direction of Travel

The rapid spread of Omicron is making headlines across the globe and sucking the life out of risk appetite. The risks to world growth have been underpinned by the body-blow that was dealt to President’s Biden signature fiscal package.  Asian shares dropped overnight, futures fell, treasuries were back in favour and oil prices slid.  The Netherlands has entered a strict lockdown that will last the Christmas period; the local Italian press has warned of further restrictions to come; Germany’s Health Minister Lauterbach has said that the country is headed for its fifth wave of the pandemic; more European countries have increased borders restrictions on travellers from the UK; and Fauci, the US Chief medical Advisor to the President, has cautioned that Omicron is “raging through the world” and will put a strain on US hospitals.  That said, Fauci is at least suggesting that lockdowns in the US will likely not be necessary.  In the UK the health secretary has refused to rule out further curbs before Christmas.  The UK government’s science advisers are urging tighter Covid restrictions in England.  However, such an announcement would serve to complicate the difficult position of PM Johnson even further.

Just a day after the news that Tory party had lost its safe seat in North Shropshire came the resignation of Brexit Minister Frost on Saturday.  His resignation letter expressed his concerns over the ‘direction of travel’ of Johnson’s government with respect to rising taxes and the recent Plan B of new Covid restrictions. The Telegraph ran an editorial yesterday titled “I would rather live in omicron Britain than authoritarian Europe”.  Beyond the jingoistic tone of this report it does describe the sentiments of many Tory back-benchers regarding restrictions.  Around 100 Tory MPs had earlier this month voted against Johnson’s proposal to introduction Covid passports for large venues – a measure that was only passed with the support of the Labour opposition.

In the wake of Frost’s departure senior Tories are reportedly urging PM Johnson to present the party with a fundamental set of changes.  That hasn’t stopped reports suggesting that some in Westminster are openly talking about a potential leadership challenge.  It has already been announced that Foreign Secretary Truss will replace Frost as the UK’s lead negotiator with the EU in post-Brexit talks, a post that she will fit in alongside her existing duties.  Truss campaigned to remain in the EU ahead of the 2016 membership referendum, though she has subsequently said that she would vote ‘Leave’ if the referendum were held again.  There is some speculation that the government could use Frost’s departure as an opportunity to reset relations with the EU, particularly since there is some suggestion that the UK has already softened its stance.  In the past few days, the UK government has indicated that the European Court of justice could have a role in the Northern Ireland Protocol;  though European Commission Vice President Šef?ovi? is not yet ready to discuss this.

US President Biden’s USD 1.75trn ‘Build Back Better’ bill has been thrown into disarray due to the resistance of key a democrat, Senator Manchin.  He has remarked that he “cannot take the risk with a staggering debt of more than USD 29trn and inflation taxes that are real and harmful to every hard working American at the gasoline pumps, grocery stores and utility bills, with no end in sight”.  The US Senate is evenly split between 50 Democrats and 50 Republicans, and the bill has no Republican backing.  Fears of less fiscal support combined with the impact of the Omicron variant clearly complicate expectations about how far and how soon the Fed will be prepared to hike interest rates next year.

The PBoC’s decision to lower its benchmark 1 year loan prime rate for the first time in 20 months today came as a surprise to many analysts.  29 out of 40 forecasters in the Reuters survey had anticipated a move, though the consensus in the Bloomberg survey was for an unchanged announcement.  Recent indicators including retail sales and investment growth have slowed in China and further monetary easing could follow.  That said, the move does raise some concern that the authorities could stimulate the country’s already highly leveraged property market.  The one-year LPR was lowered by 5 basis points to 3.80% from 3.85% previously, while the five-year LPR remained at 4.65%.

Only 30% of registered voters cast a ballot at Hong Kong’s legislature poll under the weekend.  This was a protest against the fact that all candidates had been vetted for their loyalty to China’s ruling communist party.  More than 10,000 police officers had been deployed across the city to keep the peace.

On Friday Russia demanded a legally binding guarantee that NATO would give up any military activity in Eastern Europe and Ukraine and part of a list of demands it want to negotiate with the West.  Some of the Russian demands have already been ruled out by the West but Washington will reportedly respond this week.

Turkey’s President Erdogan continues to hang the TRY out to dry with his remarks on the need for more interest rate cuts, the latest of which appears to indicate that Islam is providing the base for his economic policies.  Last week, the Turkish central bank hinted that the easing cycle may be over, but the markets know who is really in charge. 

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