Buying The Omicron Dip

The omicron variant sent markets tumbling on Friday: Perfectly-timed uncertainty with the US on Thanksgiving holidays.

Dip-buying opportunity or winter of discontent?

From a Keynesian Beauty Contest perspective, I'm struggling to make the bear case.

  1. Is the panic justified?

  2. Is the dip explainable as a moment of temporary irrationality?

It's too soon to tell if the panic is justified (although panic is rarely justifiable)

BioNtech say it will take up to two weeks to determine if the current vaccines are effective against omicron.

It's clear that the variant has already spread, with cases reported in the UK, mainland Europe, Hong Kong, Australia & Israel, as well as the South African & Botswana cases known before the weekend.

This was yesterday 👇

 Confirmed cases of new coronavirus variant:

- South Africa: 88

- Botswana: 6

- Hong Kong: 2

- England: :2

- Czech Republic: 1

- Belgium: 1

- Israel: 1

- Italy: 1https://t.co/GdQqCoxU5T— BNO Newsroom (@BNODesk) November 27, 2021 

And it looks like it's already been around for a while...

The other five members of his family -- the man’s wife, two children, mother and mother-in-law, have also tested positive for Covid. Investigators are seeking to confirm whether they, too, have the omicron variant.

“Considering my family, which includes men and women aged from 8 to 81, and the mild symptoms we experienced in these 10 days, I can say that I am happy to have been vaccinated since the vaccine worked very well,”

A positive anecdote tucked away in there.

If vaccines are effective, what are we worried about? The news flow has been relatively positive over the weekend...

While South Africa, which first identified the new variant, currently has 3,220 people with the coronavirus infection overall, there’s been no real uptick in hospitalizations, Barry Schoub, chairman of the Ministerial Advisory Committee on Vaccines, told Sky News on Sunday.

“The cases that have occurred so far have all been mild cases, mild-to-moderate cases, and that’s a good sign,” said Schoub, adding that it was still early days and nothing was certain yet.

“Initial reported infections were among university studies -- younger individuals who tend to have more mild disease -- but understanding the level of severity of the omicron variant will take days to several weeks,” according to the WHO statement.

The large number of mutations found in the omicron variant appears to destabilize the virus, which might make it less “fit” than the dominant delta strain, said Schoub.

“In a way, hopefully it won’t displace delta because delta we know responds very well to the vaccine,” he said.

That answers the first question. The panic probably isn't justified given the information available so far.

So, is the dip explainable?

Well, the ideal anatomy of a dip is a brief period of irrationality.

Investors temporarily lose sight of the big picture & sell in a panic.

 Slow bleeds kill.

Fast falls are for buying.

I don’t make the rules— David Belle (@davidbelle_) November 28, 2021 

Fast market moves cause liquidity cascades... (mentioned here) 👇

Before dip buyers step in and buy at discounted prices, below 'fair value'.

For me, this dip in risk ticks every box.

It's entirely explainable by the mixture of holiday markets & thin liquidity.

Plus, risk markets were already looking for an excuse to sell off (or couldn't find any reasons to head higher) & this looks like the opportunity bulls have been waiting for.

Oil seems such an obvious candidate...

 Oil right around the 200DMA, down over 10% on the day

I don't want weekend risk but... pic.twitter.com/sS6VwPwHuz— Tim (@VolaTim) November 26, 2021 

CL Futures (Brent feed is broken) 

JPMorgan and Goldman Sachs both make the case for this being an over-reaction...

 JPMORGAN: “72/bbl Brent is implying a negative 2 mbd hit to demand over the next three months .. Unless the #Omicron variant creates a demand environment more similar to the early days of COVID .. , we do not expect the kind of demand decline implied .. to materialize.” pic.twitter.com/Zoy9ulfrtk— Carl Quintanilla (@carlquintanilla) November 28, 2021 

As Goldman's commodity strategist Damien Courvalin, who has emerged as Goldman's designated oil cheerleader and who in the past 4 months has been quite vocal about his $90+ oil price target in the coming months, writes today at $74/bbl Brent, the market is pricing a roughly 4 million b/d negative demand hit over the next three months, with no offsetting OPEC+ response.

To put this into its stunning context, global oil demand fell "only" 2 million b/d peak to trough during last winter’s Covid wave, meaning that today the market priced in a twice as severe wave as last winter!

A worst-case outcome means oil is fairly priced at $80.

At its closing price below $73 it's a steal.

To top it off, OPEC were already making noises about oil moving into surplus next year with concerns over demand...

Could this give them the perfect excuse to at least pause production hikes?

They've already postponed the technical meeting to evaluate the impact...

And the sources are out...

"We need more time to understand what this new variant is and if we need to overreact or not," one OPEC+ source said.

Generally speaking, for all risk markets I'm expecting a Buy Now, Ask Questions Later mentality to prevail.

Not because anyone knows anything.

Because everyone thinks that everyone else thinks that everyone else has over-reacted.

Not typos. That's the Keynesian Beauty Contest.

I might be entirely wrong, and news flow could go completely the other way if any of this turns out to be 'worse' than feared 👇

 BREAKING: South Africa's president says there will be more data in the next few days and weeks about Omicron's transmissibility, severity and the effectiveness of existing vaccines— The Spectator Index (@spectatorindex) November 28, 2021 

The Fed taper also looms large if this variant doesn't turn out to be anything too concerning.

Powell is set to speak in front of the Senate Banking Committee on Tuesday, and will surely be asked if this variant impacts the tapering timeline.

It's set to be a very interesting Sunday night open!