- The Omicron covid variant has been rattling markets and is set to dominate for a few more days.
- Suspected vaccine resistance is one critical type of headline that could move markets.
- Omicron's lethality is another key factor that could move investors in two ways.
"When you have to shoot, shoot, don't talk" – that famous line from "The Good, the Bad and the Ugly" resonated with what some governments did in response to the discovery of Omicron, a new and potentially dangerous COVID-19 variant. Markets also "shot first" by selling, then sat down to think.
The evolution of a contagious, deadly, and vaccine-resistant coronavirus strain was always a possibility, and fears that it is happening now scare markets. However, it is mostly the uncertainty that caused the panic. Thin holiday liquidity also exacerbated the moves.
What has happened until now?
Health experts in South Africa were alarmed by the rapid spread of covid in some areas, ran genetic sequencing and found a new variant with more mutations than usual. The existence of many genetic changes in the area of the virus that vaccines attack, raised the alarm.
The World Health Organization followed by designating the strain as a "variant of concern" and named it Omicron, the 15th letter in the Greek Alphabet. Since then, several countries have slapped on travel restrictions and some began reporting cases of the variant.
Markets tumbled on Black Friday, a day in which Americans are digesting their Thanksgiving meals and busy shopping and market liquidity is low. The safe-haven dollar advanced, but mostly against commodity currencies. The pound also suffered.
The lack of funds exacerbated the falls. Demand for safe bonds was so strong as to send yields tumbling down, weakening the greenback against the safe-haven yen and franc – and also vs the euro, which became a funding currency once again.
When traders returned on Monday, however, the mood improved due to countertrend, bargain-seeking and several seemingly positive developments.
What is known about Omicron?
The one certain development is that this strain is highly contagious. That is what set the alarm in South Africa and rapid spreading is feared elsewhere. However, it can also be a positive development, if some encouraging news materializes.
Watch out for 1: Lethality
So far, health officials in South Africa and its neighboring countries have reported that people infected with Omicron only have mild symptoms. They warned that these are early days and that most of those with the variant are relatively young and healthy.
If headlines continue suggesting that Omicron is mild, it is good news in two ways. Apart from being less deadly and causing fewer restrictions, the highly contagious Omicron could also crowd out Delta, further improving the situation.
Conversely, if Omicron is as deadly as Delta or worse, it is undoubtedly depressing news.
Watch out for 2: Vaccine resistance
Scientists suspect that Omicron could evade existing immunization schemes due to the composition ond amount of its mutations. Vaccine makers such as Moderna and Pfizer said it would take them roughly 100 days to get modified vaccines to the masses – a lifetime for markets.
If dealing with Omicron requires new vaccines, it will imply a substantial economic slowdown, as people will be required to hunker down – with or without restrictions.
However, if headlines suggest that existing jabs are at least somewhat efficient in dealing with Omicron, it is good news. Booster shots and minor restrictions could suffice.
Market reactions
Low lethality and the holding up of vaccines could send stocks higher and bond yields lower. In turn, commodity currencies would rise while majors could return to shaking according to their own issues.
If Omicron is deadly and beats vaccines, however, shares could plunge and investors rush to bonds – sending yields lower. Yet the dollar would eventually rise against all currencies, even if bond yields collapse.
