COVID Variant B.1.1.529 And The Fed Wildcard

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There is a new COVID variant – B.1.1.529 – that is spreading extremely rapidly in South Africa – far faster, in fact, than the Beta and Delta variants as you can see in the chart above from John Burn-Murdoch. As a result, European stocks are crashing overnight with the Stoxx 600 down ~2.5%. US Futures are down as well – though not by as much.

The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system – Fed Statement before the market open Tuesday October 20, 1987

Obviously stocks are going to get hit today. The wild card is The Fed. If the selling gets really bad – say > 5% – my guess is that Powell will take a page from Greenspan’s playbook and make a similar announcement to the one above that Greenspan did in the wake of Black Monday. This also has implications for the Fed’s December Meeting and the taper.

If the market does sell off hard today (i.e. > 5%) and Powell does take a page from Greenspan, it changes everything. Instead of topping, the market may instead surge higher into the new liquidity, at least into year end. On the other hand, this will pour more gasoline on the inflation fire, be bearish for fiat currencies and bullish for the precious metals.

Obviously I don’t know what the Fed’s threshold for acting Monday morning is but I’ll be keeping an eye on the -5% level in the S&P today. If it looks like we’re going to close worse than that, I am planning to cover all of my short positions.

Based on the futures, it doesn’t look like we’ll get there but better to be prepared. Even if it’s not that bad today, the sell off could continue Monday and this could be the playbook heading into Tuesday.

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