Geopolitical Developments: India Will Determine Whether Omicron Fells The Global Economy in 2022 And Its Success Is Critical For The Long-Term As Well

Geopolitics is taking a backseat this morning as worries about gridlock in Washington and rivalry with Beijing have been displaced by optimism re Omicron and economic momentum. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. The action in EM currencies indicates the $US is somewhat weak. But there was also one negative factor across global asset classes. The US yield curve is bear flattening. Expect the S&P 500 to be range-bound over the next few days.

American foreign policy is important to the financial markets only to the extent that it maintains the status quo of American leadership and dominance. The markets don’t care whether foreign policy goals are met so much as whether they are effective at limiting the risks of a global catastrophe that envelops the US. Since WWII American foreign policy has only failed at maintaining the status quo once, namely the 1970s when the goals in Southeast Asia and the Middle East were rebuked and this led to the decoupling of the $US to gold, resulting in inflation that parlayed into stagflation as Americans lost confidence in politicians. The markets were up and down and generally poor performers during this decade, but since then America has made no disastrous foreign policy mistakes to shake American confidence.

Unfortunately the market’s salutary view of foreign policy is antiquated since it rested on the notion that the American model of liberal democracy was the best. Clearly the world now has confidence in the Chinese model and America is locked in a Thucydides Trap with China. So American foreign policy must improve and India is critical to the success of America’s foreign policies since it sits at one end of the “Indo-Pacific” strategy began by Obama and its primary antagonist is the one country that stymies America’s Middle East policies, namely Pakistan.

India must succeed economically in order to be a good ally to the US. And the more India succeeds economically the more its own foreign policies can benevolently alter the trajectory from a China-centric world back to an America-centric world. While India is doing well at present there are major risks, as CNBC notes “Gross domestic product grew 8.4% from July to September — India’s fiscal second quarter — compared to a year ago... They pointed out that private consumption performed better than expected in the September quarter, likely helped by the festive demand, which is set to ease in subsequent months. India’s exports may also soften in line with a moderation in external demand conditions, they added…That’s because India’s fiscal deficit target of 6.8% of GDP may limit the room for government spending as tax revenue is expected to be lower due to tax cuts on fuel and divestment receipts might disappoint, the ANZ analysts said…“The uncertainties around the omicron strain could require India to achieve a much higher vaccination rate before there is a durable recovery in household spending, Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics, said.”

India may move backward depending on Omicron and its own limited ability to fight COVID. But another positive factor for India is the generally pro-business attitude of popular PM Modi. DW notes “The minister announced that with the exception of four strategic sectors, the government would either privatize or close all public sector enterprises. These strategic sectors include atomic energy, space, and defense; transport and telecommunications; power, petroleum, coal and minerals; and banking, insurance, and financial services…However, even in these four strategic sectors, the government would retain "a bare minimum" number of firms, Sitharaman said.” So key is whether Modi really privatizes India’s backward public sector and keeps business confidence high.

Yesterday I sold my significant long position that I took on Wednesday via the leveraged ETF UPRO. My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), and a small net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).