Omicron and markets: what we are watching

The COVID-19 situation had not been looking good across Europe anyway, but at least there was the hope that the shift into an endemic scenario was not far away, especially with a re-acceleration in vaccinations, boosters and the availability of antiviral drugs. This may well still be the case, but the emergence of a new variant of concern has added to the tail risk that it isn’t.

We are neither virologists nor epidemiologists. But from a market perspective, there are a few things we can say about the virus without their expertise.

It’s still very early and there is little data about B.1.1.529, now known as ‘Omicron’, but it appears to be spreading faster than the Delta variant did in South Africa. It has many mutations that in other variants have been associated with greater transmissibility and evading immunity.

The variables we will be watching most closely are:

• Is it more transmissible?

• Is it more likely to lead to hospitalisation and is it more lethal?

• Do vaccines and antivirals still work against it, and how well?

Déjà nu all over again

We must also consider the response of policymakers. It’s relatively easy for major central banks to do nothing for the time being. Rates are already at zero with some tapering underway. It’s a bit trickier for the Bank of England, given expectations of a December hike, but the Federal Reserve (Fed) does not have to speed up tapering in December.

Fiscal support, if needed, should be no different than in previous waves. In Europe, the past few weeks have shown that countries increasing restrictions are just as willing to renew fiscal support measures as previously. In the US, Democrats being in control of both the House and Senate – and with an election coming up next November – should make building consensus to support the economy easier than in 2020.

Restrictions have already been ramping up in Europe in response to the winter wave. New variant concerns could accelerate this dynamic. The US faces a different situation, as a new variant would require a greater shift from the status quo. China’s zero-COVID strategy would be more difficult to maintain with a more transmissible variant.

Mandatory vaccination has already become more likely in several European countries, and a new variant could push more towards this step. This would have little immediate impact on markets, but could potentially be positive for 2022.

Markets will clearly remain sensitive to news on the variables mentioned above. But our initial line of thinking is that market weakness around a new variant, similar to geopolitics, creates an opportunity to increase risk in portfolios.