Interpreting the market implications of Omicron
There is a lot we don’t know about the latest virus mutation – labelled Omicron. Markets are clearly concerned by the fact that the early studies suggest it is a significant mutation and appears to be considerably more infectious than former strains.
Below are some points to consider with regards to how markets should be repricing in the face of this news:
- What is critical for economic activity is whether infections remain decoupled from hospitalisations and deaths. This decoupling depends on:
a) Efficacy of current vaccines and/or the speed with which current vaccines can be tweaked and rolled out. If it does need to be tweaked it might take a few months to produce and rollout. But governments will be throwing money at the problem in a bid to condense timetables. One only has to take a look at the speed of the booster rollout that is happening in many parts of Europe to see how desperate governments are to avoid further significant restrictions.
b) The new drugs that have been created to reduce the symptoms of those infected are still in their infancy but may still be effective.
- The economy has adapted. The economic impact of each successive wave has diminished over time as businesses have found innovative ways of reaching customers.
- Demand is largely delayed, not destroyed. We have also seen repeatedly in former waves that the type and timing of spending is altered but temporarily. People shift towards goods spending rather than services and/or postpone spending till restrictions ease, when demand then bounces. See the US delta wave in September for example.
- Offsetting policy – what might prove even more influential in propping up markets is the read through that this will encourage even looser fiscal and monetary policy. We have seen on many occasions that in the battle between fundamentals and liquidity, liquidity has won. Bond markets have already significantly repriced the risk of rate hikes in the near-term which is understandable since developed world central banks have shown us that they will not tighten if high inflation is not coupled with growth. This latest news will give them another reason to be hesitant.
In conclusion, there is a lot we need to learn in the coming days and weeks which certainly argues for a more cautious stance. However, for the reasons above, an outsized knee-jerk reaction also appears unwarranted.