GLOBAL CREDIT BULLETS | Monday, 27th December 2021

Omicron – Christmas relief.
Evidence on the Omicron data turned better into year-end. Several studies found reliable evidence that the Oomicron variant presents milder symptoms. A UK government study confirms the variant is 50-70% less likely to trigger hospitalization. The finding adds to previous evidence coming from South Africa. Moreover, both Pfizer and Moderna confirmed findings on the effectiveness of third dose boosters. Cases remain on the rise across Europe, but vaccine effectiveness and lower risk of severe disease reduce chances of further restrictions. As hospitalizations remain under control in most countries, measures before Christmas have been avoided and the outlook for January has also improved. As a result of better news, equities outperformed into year-end. We still see value and re-opening trades among the most interesting risk assets in a tight valuation environment. As virus news improve, the sector is likely to continue to do well, also helped by relatively low sensitivity to rates/inflation..

Geopolitics – Wind from the East.
Tension in Eastern Europe continues. In the past month, Russia has accumulated troops at the border with Ukraine and demanded geopolitical concessions to the US, such as a guarantee of no NATO membership for former Soviet Union states. Assets in the region have dropped amid fears that tensions could lead to an invasion. We find it hard to make a call of chances of a war, as the final outcome may be triggered by sudden tensions which are hard to forecast. Still, we think the diplomatic way is wide enough for further tensions to be avoided. Russia wants its role of regional leadership to be recognized by Western countries, and Ukraine is anyways very far from qualifying for NATO membership. Moreover, high energy prices mean it is very costly for Western countries (Europe in particular) to stand off with Russia for long. As a result, an involvement of Russia in NATO membership discussions could happen at relatively low cost for the West and may be a first step for de-escalation. Over the weekend, Russia retired some troops from the border in a potential sign of ceasefire over holidays. Putin and Biden met in December, and a new round of talks is scheduled on January 12.

Turkey – Year-end drama.
The end of the year has been characterized by more volatility in Turkey. In an effort to stem the dramatic downward spiral in the Turkish lira, the government has introduced measures to facilitate local conversion of dollar deposits into lira. In practice, the government commits to compensate Turkish lira depositors for any losses due to devaluation. This moves the burden of lira depreciation from the private to the public sector and works to facilitate lira stability, given the very weak starting point. On the news, the Turkish lira has appreciated meaningfully from the lows, and it’s now 40% stronger than last Monday. The scheme is likely to be more effective than previous measures, as it provides a strong incentive for retails to de-dollarize at least partially. Still, we are sceptical the scheme will provide a long-term anchor for the country: inflation remains high (may easily get above 40% in 1Q22, as preliminary data show), credit will be easy into 2022, and wild currency volatility makes investment difficult. Moreover, interest paid on the scheme is capped at 17%, much lower than inflation. Finally, the central bank has depleted some $17bn of reserves in December, half of its net reserves, suggesting the balance sheet of the country is actually weakening. Long-lasting stability would require a more permanent shift to orthodox policy.