Daily Brief - The silent (Saturday) market crash (Dec 6, 2021)

A shadow market crash took place over the weekend. Leveraged investors watched helplessly as their bitcoin positions were getting obliterated in crypto’s drop to 42,000 on Saturday morning. Crypto market is the only one open through the weekend, making it a proxy for risk sentiment. (Until 1952, US stock markets were actually also open on Saturdays.)

But it all started earlier in the week as the world started wrapping its head around Omicron, and the Fed refused to budge on its taper course. Investor sentiment took a hit.

Investors were still dumping technology stocks into the close on Friday, marking a volatile end to two weeks of big swings in prices across asset classes.

Everyone was searching for clues about why assets from stocks to cryptocurrencies were so jittery, and when the selloff may be over.

The first clue came early. Federal Reserve chair Jay Powell on Tuesday disappointed investors hoping for a more dovish message in light of the Omicron emergence. He signalled his support for a quicker wind-down of the central bank’s $120bn-a-month of bond purchases. In the eyes of many, the unprecedented liquidity injection has been a crucial pillar for the rally in … well, pretty much everything.

Another clue was a mixed jobs report. The Bureau of Labor Statistics report showed the US economy added just 210,000 new jobs last month. That may seem like a lot but markets are in the expectations game: 210,000 was fewer than the 550,000 investors and economists were looking for.

On the other hand - as you may have noticed, one-handed economists face a serious career handicap because they can’t hedge their spotty forecasts - the unemployment rate still fell to its lowest level since the pandemic began. This has left the door open to a faster pace of monetary policy tightening.

Finally, there is the overhang of a more transmissible version of the Delta variant. Energy markets have been roiled by it for the better part of the last two weeks, and oil prices have left many commodity traders with premature shocks of gray hair.

There are a few important things to remember as one ponders direction of risk assets.

One, Fed isn’t actually tightening: it’s merely reducing the amount of additional stimulus injected into the economy. That’s important because it implies liquidity is STILL being pumped into the economy.

Second, we have yet to see any evidence that the latest variant of the virus is actually more harmful than Delta. Delta caused a lot of disruption, to be sure, but since then many people have been vaccinated. The world even has some oral antiviral treatments available, limiting reliance on medication better suited for horses than people.