S&P 500 retreats from record highs on Omicron concerns and ahead of Fed monetary decision

Posted on December 14, 2021December 16, 2021 by Vrasidas Neofytou

S&P 500 index retreats from recent record highs as investors are concerned over the impact of the highly mutated Omicron covid variant on the global economic growth and ahead of the highly awaited monetary decision by the U.S. Federal Reserve this week.

Risk-off mood over Omicron variant fear:

Risk aversion sentiment hit the global stocks on Monday after UK Prime Minister Boris Johnson confirmed Britain’s first death linked to the new Omicron variant, warning of a “tidal wave” of new cases, while the World Health Organization said it poses a “very high” global risk, with some evidence that it evades vaccine protection.

Hence, UK Health secretary Sajid Javid said Omicron strain accounts for 20% of confirmed COVID-19 cases in England, while the estimated number of daily infections is about 200,000, forcing Johnson’s administration to open hundreds more vaccination sites in the coming days to ramp up the delivery of booster shots.

Market reaction:

The S&P 500 index pulled back by nearly 1% from Monday’s record closing highs (its 67th record high of 2021), led by losses in tech giants Microsoft, Tesla, Apple, and Nvidia, while the industrial Dow Jones fell 0,9% following a general risk-off mood in global markets driven by the growing worries over the first death from Omicron variant in the UK and the first Omicron-led covid cluster in China.

S&P 500 index, Daily chart

Risk appetite turned around, with investors selling stocks that benefit from the reopening of the economy after the pandemic such as airlines, cruise lines, energy, retail, and financials.

Yet, the most losses were found in the tech-heavy Nasdaq Composite, which dropped by almost 1,5%, as traders rotated out of high-leveraged technology stocks with inflated valuations and huge debts, making them vulnerable to the coming higher interest rates.

Federal Reserve monetary decision:

The world’s largest central bank Federal Reserve kicks off a two-day policy-setting meeting later today, while the chairman Jerome Powell is going to host a press conference tomorrow afternoon discussing the bank’s Q4 projections for the U.S. economy, elevating inflation, and possible rate hikes.

The market is looking for any clues regarding how fast the Fed will taper its bond-buying program, an $120b per month purchases of U.S. Treasuries and agency mortgage-backed securities (MBS) which ends in June 2022, and any signals for interest rate hikes in 2022 and beyond, to fight the surging inflation, as the U.S. Consumer Price Index (CPI) rose to 6,8% in November.

Brent oil rebounds above $75/b as Omicron worries fade away

Posted on December 9, 2021 by Vrasidas Neofytou

Brent crude continues rebounding from recent monthly lows, topping $76/b on Thursday while the price of the U.S-based WTI oil contract is recovering above $72/b as energy traders are confident that the spread of the new Omicron covid variant would not harm the global economic growth and slow down the surging demand for petroleum products after the pandemic.

Hence, the appetite for the growth-sensitive crude oil contracts increased yesterday after the vaccine-makers Pfizer and BioNTech said that a three-shot course of their Covid-19 vaccine may protect against infection from the Omicron variant.

V-shaped price recovery:

Both crude oil contracts extend gains for a fourth straight day on Thursday, recovering almost most of the damage that occurred after the announcement of the new Omicron variant from WHO last week.

WTI and Brent fell to as low as $62/b and $66/b respectively on Dec.02 based on the worries that the new highly mutated Omicron variant might reduce global economic growth and trigger a new wave of fuel demand destruction just as OPEC+ supply increases.

Brent crude, Daily chart

Many countries have already introduced travel restrictions to and from countries in Southern Africa, while some others have resumed full or partial lockdowns including Austria, Germany, and Denmark to stop the spread of the virus, reducing the demand and the consumption of jet fuels and gasoline.

However, the early indications that the Omicron variant is not so severe as initially feared since the hospitalizations have not increased, triggered a buying wave for economically sensitive assets including the crude oil, allowing the contracts to recover from last week’s fierce sell-off.

Finally, oil prices continue recovering even though OPEC+ decided to increase production by 400k bpd for the month January 2022, despite the Omicron-driven uncertainty.

Will stock picking ever come back into play?

Posted on December 8, 2021 by George Kessarios

One of the main characteristics of the current investment environment is the extreme concentration of a meg-cap stocks in ETFs and funds as a result of ETF investing.

While the Nasdaq 100 has lost a fraction of percentage points from its all-time highs, more than 30 components are down 25% or more, with high flaying names like Peleton down by over 70%, Baidu, Zoom, and Biogen by about 50%, Paypal holdings by 40%, and even names like Intel down by about 30% from its highs. In fact, just 8 components comprise over 50% of the Nasdaq 100 index. And this data is prior to December 1, when the ARKK ETF fell by about 6.5% in one day, followed by another 6% last Friday.

This over concentration has elevated the valuation of the top components to extreme levels, but companies which are not represented enough in most ETFs have an extreme low valuation.

And the question is, how vulnerable is the US market if stocks like Tesla and many of the top components of the S&P 500 and Nasdaq 100 Indexes start to fall? Will the money roll over to other unloved sectors and stocks, or will everything collapse, and cheap stocks will become even cheaper?

We don’t really know what might happen, but the recent correction in high flying technology names might force fund managers to be more selective. Fund managers for years now have been buying companies with a total disregard for valuation metrics. No valuation was too high as long as a stock had marginal improvement in adjusted EPS and revenue growth. That is, until the multiple was so far stretched, that no matter how much a company beat expectations, its stock went down. The 42% one day correction of DocuSign last Friday is probably a small indication of what might happen over the next several months.

The bottom line is passive ETF investing has created huge valuation disparities because of the extreme high concentration of money into specific stocks. However, the recent correction in high flying multiple stocks might be an excuse for selective stock picking one again. If confirmed, fund managers might actually pay attention to the valuation from now on, instead of focusing on marginal adjusted EPS improvements and revenue growth, but with a total disregards for valuations.

Global risky assets advance as Omicron concerns ease

Posted on December 7, 2021December 7, 2021 by Vrasidas Neofytou

Global financial stocks bounce strongly from their recent lows as concerns over the impact of the Omicron variant in the global economy have eased, renewing the appetite for companies that benefit from the economic expansion.

Stock indices plunged nearly 2% last Friday led by tech and economically sensitive assets; on worries over the new Covid variant coupled with the lower-than-expected U.S. Nonfarm Payrolls for November.

Risk-on mood following the Omicron early assessments:

Even though well-known epidemiologists have certainly cautioned against premature conclusions on the Omicron variant, investors turned bullish at the beginning of the week following the early assessments of Omicron cases which have been declared mild.

Preliminary reports suggest that the new Covid variant is less severe than initially expected, with mild symptoms and no hospitalizations.

On top of that, Dr. Anthony Fauci, the top U.S. infectious disease official, said yesterday that it does not look like Omicron has a “great degree of severity”, triggering a buying wave for risky currencies such as Australian and New Zealand dollars and stocks from economically sensitive sectors such as travel, finance, retail, and energy.

The main U.S stock indices have recouped most of the Omicron-led losses from last week’s sell-off driven by growing concerns and uncertainty over the new covid-19 variant.

S&P 500 index, Daily chart

Dow Jones index posted a strong comeback on Monday, gaining 1,9%, followed by 1,1% gains in S&P 500, and 0,9% from tech-heavy Nasdaq Composite, while their stock futures jumped another 1% on early morning Tuesday’s session.

European and Asian-Pacific shares also advanced higher this morning, soaring more than 1%, following the overnight gains on Wall Street and the bullish market euphoria.

Chinese shares led the gains after the People’s Bank of China said on Monday it would cut the amount of cash that banks must hold in reserve (RRR cuts), its second such move this year, releasing the funds in long-term liquidity to bolster slowing economic growth.

WTI crude oil, Daily chart

WTI and Brent crude oil prices rebounded up to $72/b and $75/b respectively on Tuesday morning, erasing the half of last week’s huge losses on growing worries that rising coronavirus cases and the new Omicron variant could reduce global demand for petroleum products.

Coffee prices hit 10-year highs on weather-led supply disruptions

Posted on December 2, 2021April 13, 2022 by Vrasidas Neofytou

Agricultural commodity inflation is here to stay elevated longer than expected due to a combination of demand/supply imbalance, and extreme weather, making food and beverages more expensive for all people around the world.

According to the Food and Agriculture Organization of the United Nations, world food prices have soared more than 30% since the beginning of the year, hitting their highest level in more than a decade, driven by robust demand and smaller-than-expected harvests.

Unfortunately for the coffee lovers, in the past 12 months, the Arabica coffee futures price (KC)-the benchmark price for commodity-grade Arabica coffee on the New York International Commodity Exchange (ICE)- has surged over 100%, rising from $1/lb (lb or pound is 454g) to near $2,50/lb at the end of November, the highest level since 2011.

Arabica Coffee contract, Monthly chart

Those for Robusta coffee (RC)– a cheaper, less palatable alternative – have also risen over 100%, from the multi-year lows of $1,10/lb in March 2020 to the 10-year highs of $2,30/lb on December 02, 2021.

Bullish fundamentals drive the coffee prices to fresh records:

The spike in coffee prices was driven mainly by the huge imbalance between the global supply and the surging coffee demand, while the lack of shipping containers deteriorated the problems of the coffee supply around the world.

As a result, coffee experts believe that there is every chance that these prices will rise higher in 2022 and beyond since the global coffee supply is running low amid a smaller-than-expected harvest in Brazil while consumer demand is booming against low inventories and stocks.

Supply disruption after extreme weather in Brazil:

The global coffee supply declined dramatically in 2021 following extreme weather in Brazil, the world’s largest coffee producing and exporting country-which accounts for around 35% of global harvest- driven by unexpected severe drought and unusual frost conditions.

The first and the most important negative catalyst for the coffee supply was the very severe and prolonged drought- that was the country’s worst dry spell in nearly a century- that started earlier in the season, reducing the number of coffee trees and cherries in Brazil’s coffee growing regions, known as the “Coffee Belt”.

On top of that, the situation deteriorated after same region was also hit by the worst frost since 1994, destroying approx. the two-thirds of trees and coffee cherries.

Coffee stockpiles at record low levels:

Due to the extreme weather in Brazil, it is estimated that this year we had the smallest Arabica coffee production in the last twelve years.

As a result, the ICE Futures U.S. reported recently that the stockpiles of the premium coffee bean “Arabica” in certified warehouses have plunged to the lowest level since 1998, indicating how serious is the global supply deficit.

The volume of production regularly fluctuates between “on” and “off” years, and usually, this is not sufficient to greatly affect prices because producers mitigate their risks through stock management and hedging prices using the coffee futures market.

Solid demand for coffees around the world:

Demand for coffee, the world’s favourite beverage, remains surprisingly strong despite the Covid-19 pandemic and the social restrictions; as coffee lovers continue drinking plenty of coffees at home or from coffee shops.

The National Coffee Association, the industry’s trade group, also said coffee demand didn’t get damaged by the pandemic.

Market experts say that the global coffee demand today has doubled in volumes than it was in the last time a major frost hit Brazil (1994-95), forcing coffee brokers to go into an extended frenzy of panic buying in 2021.

Higher retail coffee prices ahead:

The retail coffee prices haven’t surged as significantly as many other food and beverages so far, since coffee companies and brands buy huge quantities of coffee beans in advance and have hedging strategies to defend their profit margins and keep the selling prices in check.

Unfortunately, if wholesale coffee prices remain to current record-high levels for a longer period combined with the elevated logistics, energy costs, and higher wages, the costs will have to pass to the coffee drinkers, adding to the current soaring food inflationary pressure.

What to expect for the future?

The big question is how much this can affect production in the next coffee seasons since the coffee trees can take up to five years to mature, meaning that it will take some time until we have a complete picture of the disaster.

If it turns out that the damage is as great as it seems to be, and the frost has destroyed 2/3 of the production; it is a given that there will be a very large reduction in production for at least 3-4 years ahead.

This in turn will increase Arabica prices beyond the current record levels, effectively tripling or quadrupling the prices we knew until last year. There is, of course, the scope for finding a solution by increasing production in other low-quality varieties, such as Robusta of Vietnam.

Unfortunately for the coffee drinkers, the way we drink coffee one way, or another is expected to change very soon for a longer time.

Global markets drop amid the emergence of Omicron variant

Posted on December 1, 2021 by Vrasidas Neofytou

Global stocks dropped sharply from their records as the emergence of the highly infectious Omicron covid variant resumed fears of widespread lockdowns and travel bans, sending investors into gold and bonds for safety.

The World Health Organization warned that the new variant might be more transmissible than other strains of the coronavirus, citing Omicron’s rapid spread in South Africa during the past few weeks.

Analysts expect that the strain might delay the restart of economic activity for a few months as many countries have already reimposed precautionary measures and restricted travel to and from Southern Africa.

The market experienced fresh risk-off waves after Moderna’s CEO commented on Tuesday that the current vaccines may be significantly less effective against the Omicron variant.

Growth-sensitive risky assets are still being pressured with major stock indices losing nearly 5% since Friday, while the commodity-linked Australian and New Zealand dollars fell the most across the board.

However, it was the price of Brent crude oil that suffered the most, having fallen by more than 12% to 70 dollars per barrel for the first time since September; on fears that the new variant would lead to a freeze in petroleum demand.

Despite the concerns, some institutional investors believe that the new variant might be milder than first feared, advising their clients to stay invested and buy the market weakness.