The recent sell-off hasn’t convinced me that the market has properly adjusted to a new medium volatility regime. The recent market falls have conformed to a standard 3 to 5% pullback every 2 to 3 months.

More pertinently, they’ve not really adjusted to the Omicron threat.

The excellent Noah Smith is very good on this and here’s his bottom line: “ Omicron is spreading much faster than Delta did — indeed, even with widespread existing immunity and mitigation measures like masks and social distancing in place, Omicron is spreading as fast or faster than the original Covid did in the U.S. before we had any immunity or any distancing measures!”.

In which case January could be very bumpy indeed !!

Analysts at Deutsche Bank argue that the recent sell offs point o something a little more structural as they have been accompanied by

“….the sharpest weekly decline in equity positioning since the collapse back in March 2020 at the beginning of the pandemic. Over the week [last week] our consolidated measure of equity positioning fell from near the top of its historical range to neutral (50th percentile), the lowest this year [my emphasis].

“Overall positioning is now well below levels implied by the historically robust relationship with indicators of macro growth, which have remained elevated. While positioning overall is down sharply, that in large-cap US equities specifically has stayed more resilient and is still within the elevated range of this year. A wide variety of positioning indicators fell this week, with both discretionary and systematic strategy exposures down sharply. Notably, bullish option volumes plunged as single stock call volumes fell sharply while index puts rose. Equity fund flows have bought the dip so far, with inflows since last Friday ($16bn) not far from the robust weekly average ytd ($19bn).”

Back in Europe, I was particularly struck by this comment from Morgan Stanley’s Graham Secker which looks at tactical indicators which suggest an “attractive entry point”.

“Morgan Stanley’s Global Risk Demand Index is close to a 10Y low and at a level we consider to be a tactical buy signal. Other signs that investor sentiment has overshot to the downside include the VIX > 30,a steep put-call skew and the AAII survey where 42% of respondents are bearish (90th percentile reading). Post similar readings previously MSCI ACWI has risen 98% of the time over the next 3m and by an average of 10%.”

As an aside, I was also struck by the following comment from Morgan Stanley – 28% of European stocks are currently trading on a N12M PE ratio < 12. Really ?!

“We see little justification for a sustained further de-rating in MSCI Europe with its N12M PE now below our Dec- 22target of 15 and its equity risk premium 50bps above its 5-year average. More extreme undervaluation can be found beneath the index level with 28% of European stocks trading on a N12M PE of below 12. “

My column this week in Citywire is on gold and what seems to have gone wrong for the shiny stuff. In that, I pick up on research from Variant Perception who note that the “percentage of the US monetary base covered by US government gold reserves also remains very low.” If you’re a monetarist now must surely be the time to put your money where your mouth is and invest in gold?

Lastly an interesting note from John Leiper, CIO at Titan Asset Management. The chart below looks at the inverse relationship between China, in white, and EM Ex China, in blue, relative to the broader EM index. He observes that this relationship

“….tends to move in cycles and does so with remarkable symmetry over time. If historical correlations hold true, then we could expect China to rebound and outperform going forward. That said, I would be wary trying to catch a falling knife and relative valuations could yet fall further, as demonstrated in the early 2000s. If so, the big question is at what point China’s partially self-induced slowdown will become so untenable as to cause the authorities to throw in the towel and step on the stimulus pedal? That hurdle may prove high given President Xi Jinping’s strategic vision and clear willingness to offset long term gains against the potential for further short-term pain.”