New Omicron Variant Shakes Markets

By Johanna Fernandes, Staff Writer

Risk assets tumbled Friday off the news of the B.1.1.529 Covid-19 variant, named Omicron, from South Africa. The World Health Organization (WHO) has designated Omicron as a Variant of Concern, as it is regarded as more contagious than the Delta and somewhat more resistant to vaccines. While markets faced a huge selloff Friday, the long-term outlook depends on how the variant spreads and whether a new vaccine is needed to control it.

While the Omicron variant appears to have been circulating for months, virologists have detected almost 100 cases in South Africa as of Thursday. Early PCR test results showed that 90% of 1,100 new cases in South Africa were caused by the new variant. Originally the strain likely mutated in an immune-compromised person, potentially with an untreated HIV/AIDS patient. In such cases, the variant is harder to fight off, giving more time for potential mutations. While South Africa health officials reported the variant quickly, cases have been found from South Africa travelers in Hong Kong, Belgium, Malawi, and more. Authorities have been quick to respond, with the European Union, the U.K., Israel and Singapore were the first to ban travel from South Africa and surrounding countries. Dr. Fauci, the U.S. Chief Medical Advisor, said more scientific data is needed about the new variant before the U.S. can determine whether to halt flights from Southern African countries. The official designation from the WHO alongside research developments will propagate further travel restrictions across the globe.

With 32 mutations on its spike protein, the Omicron variant may be less responsive to neutralization of vaccine-induced antibodies. Pfizer announced their plan with the variant, “In the event that the vaccine-escape variant emerges, Pfizer and BioNTech expect to be able to develop and produce a tailor-made vaccine against the variant in approximately 100 days”. As of market close Friday, Pfizer was up 6.11%.

Central Banks efforts to slowly prepare markets for tighter monetary policy went out the window after the break of the variant news. All eyes are on the Fed as they consider the risks of Omicron alongside record-high inflation for the rate hike timeline. This will be a tough balancing act, as lockdowns and social distancing policies would further slowdown supply chains, adding heat to inflation. On Friday, markets repriced the first 25bps Fed hike from June to September. Expectations for BoE tightening has been pushed back as well, from December to February. Treasuries led the global rates rally, with the 10-year down as much as 14bps on Friday, the most since March 2020. Poor liquidity due to an early bond market close added weight to the widespread buying seen across the curve.

Image from wsj.com 

Risk assets had a huge selloff on the day as traders retreated into safe havens. The Cboe Volatility Index, the VIX, jumped over 54% on Friday. The reopening trade suffered, with small caps and cyclicals taking the beat, the Russell 2000 dropped 3.7%. The S&P 500 closed 2.3% down, DJIA index fell 2.5% and WTI crude closed more than 12% lower. The Bloomberg Dollar Spot Index finished the day 0.3% lower, while the yen rose 1.9% and Euro 0.8%.

Friday acted as a harsh reminder to markets that the pandemic is not over yet, with the potential risks of Omicron pouring into the new year.

Photo by Patrick Weissenberger on Unsplash

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