One Trader’s Bearish Market View On The Omicron Strain

While futures are sharply higher this morning – in line with Goldman’s reco not to panic and not to make portfolio changes – not everyone is as sanguine following the Friday puke, and this morning Mizuho’s head of Multi-Asset Strategy, Peter Chatwell, finds himself scratching his head, writing that he admits to “being somewhat surprised to see e-mini trading around 4640 this morning. I know, I know, “US equities only go up” etc.”

But, as Chatwell rhetorically asks, what happened this weekend? “Some harsher than expected travel bans (Japan, Israel with blanket bans, rather than targeting certain countries) appear to have not got much focus. What has been cited as the relief for stocks is an interview that Dr. Angelique Coetzee gave with the BBC on Sunday” (perhaps because it was featured prominently on this website for the past 24 hours even as the fearmongering mainstream media did everything in its power to memory hole it asap).

As a reminder, this is what a promptly buried Reuters article said:

“Dr. Angelique Coetzee, a private practitioner and chair of South African Medical Association, told Reuters that on Nov. 18 she noticed seven patients at her clinic who had symptoms different from the dominant Delta variant, albeit “very mild”.”

To this, Chatwell has a counter, and argues that “the market narrative is under emphasizing a key point, which is that the patients Dr. Coetzee treated were mainly 40 or younger. We cannot conclude that the mild symptoms will translate to older populations.“

Of course, the fact that her patients are not older than 40 does not mean that the disease is not especially mild; it just provides bears with a talking point that their rapidly expiring puts may still be in the money… maybe… eventually. And it sounds like Peter was just a tad bearish coming into Monday.

Additionally, the Mizuho strategist also asks (rhetorically) “what is the typical government reaction function” and answers:

Recall that we had a Covid financial crisis because governments generally felt that they had to implement large scale lockdowns to reduce the spread of Covid, or risk having blood on their hands (not a good look at the polls).

Curiously, his next point is one that could get people fired for being shocking honest about the true severity of covid:

Very broadly speaking, Covid itself is not a particularly potent virus – for brevity, let’s be crude and call it “strong flu like”. As with influenza, the impact is on the vulnerable in society, and on the capacity of the healthcare systems.

Why does that matter? Because “right now it looks like Omicron may be more transmissible and vaccine evasive than Delta, meaning it it likely to infect more vulnerable people.” This, to Chatwell, means that it has the ability to evade existing immune response may be more important than its expected lower severity of symptoms. As such “Governments are likely to remain cautious, biased towards greater social restrictions and partial lockdowns.”

This is also why, in Mizuho’s macro analysis of Omicron, the Japanese bank sees a downside risks to growth in Q1…

… even if even the bearish Chatwell admits that this will not force central banks into reversing course. The Fed and BoE, and others which have already begun tightening, will not abandon the tightening. Inflation is too high for that, so all that may happen is a later/slower path materializes.

In other words, for Chatwell there is the double whammy of i) accelerating lockdowns due to Omicron, coupled with a monetary policy stance that won’t change and as such ii) monetary tightening is a structural downside risk to equities, and it may coincide with weaker growth in Q1.

Bottom line: for Mizuho “a re-test of 4600 appears much more likely here than a rally back to 4700.”

Perhaps, but in a few moments we will lay out the bullish case which argues that 4,700 (and even 5,000) is much more likely than a retest of 4,600.

The full Mizuho note is available to pro subs in the usual place.