After a bit of respite yesterday, markets are back in Covid jitter mode this morning.
Much of it appears to be down to a somewhat glum headline interview with a big drugmaker in a big financial paper.
But is this really all about Covid? Or have fragile markets just been looking for an excuse to correct?
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What’s panicking markets this morning?
The Financial Times had an eye-catching headline this morning. Stephane Bancel, the head of drug maker Moderna, warned that he expects existing vaccines to struggle with the Omicron variant of Covid-19.
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Apparently this is down to the number of mutations on the “spike” protein – that’s the bit the virus uses to infect you (and that’s as far as we’re going to go into the medical science side of things today).
To be clear, he’s not saying vaccines don’t work, and they’ll be able to re-tool the existing ones given a few months’ time. And, of course, this is a newspaper interview: there is very little room for nuance here, particularly when it’s your front-page story.
But there’s no doubt that this story specifically has rattled markets again this morning. Monday saw a bit of a rally day – partly because another scientist, one in South Africa, had said that Omicron looked pretty mild – but things are less cheery again today. The oil price has dipped again, cyclical stocks (oils, banks) are feeling the pain, and most big stockmarkets are down a bit.
We discussed this on Friday, but let’s have a think about it again.
What does a new variant mean? The reality (despite the FT story) is that, as Ed Conway from Sky puts it, “much of what’s being written about it at the moment is stabs in the dark, based on anecdote or at best small scraps of data. No point in pretending otherwise.”
We don’t know what the risks are, so let’s assume it’s just yet another variant along the lines of the others. We’ve now got vaccines at least, and lots of us have had it (vaccinated or not). So there’s got to be some resistance. We must be in a better position than we were 18 months ago, so it probably doesn’t mean radical, full-on, lockdown.
But it is already having a few knock-on effects. Travel has become more inconvenient after a brief window of re-opening. We’re now all having to take “full-fat” expensive PCR tests again, even if fully vaccinated. That’s bad news for air travel in particular.
That’s the most obvious impact. Mask-wearing is becoming compulsory again, and there might be a bit more working from home, but I’m not sure if these domestic steps will have as big an impact. I suspect lots of people will shrug and get on with whatever they were getting on with before.
Panicky politicians who feel incentivised by hectoring headlines to act first and think later are probably the biggest risk. I’d like to think that no one would be daft enough to think that cancelling Christmas at the last minute is a winning electoral strategy but it’s hard to be sure.
Stick with cheap stocks
As we said already, lockdowns are disruptive, so on balance they’re most likely inflationary. People and goods are being prevented from moving around as freely as they otherwise would. That hits demand in some areas (eg, demand for flights) but it hurts supply too, and often in different areas (eg, labour force, shipping of products).
The question then is: what does that all mean for the economy and, more importantly, for monetary policy? Omicron certainly gives central bankers an excuse to go easier on tightening monetary policy.
That’s one reason the pound has given back some of its recent strength against the euro – investors wonder if the Bank of England will take the chance to save face by holding rates again in December.
You might wonder why markets haven’t reacted more positively to the idea of rate rises being pushed further back. It’s clear that expectations have indeed changed – the number of 2022 rate hikes being priced in by US Treasury markets has fallen back to two again (whether you think it makes sense to hold off or not, given where inflation is relative to interest rates, is another matter – what matters is what markets expect).
Maybe the answer is that markets were just fragile, and anything could’ve rattled them at this point. “Perhaps, like avoiding that dinner party you really didn’t want to attend, anxiety about Covid-19 is a convenient excuse,” as Dario Perkins of TS Lombard puts it.
After all, we’re in quite a tricky spot now. If it turns out that Omicron is mild and doesn’t warrant these added measures, then that’d be bullish for the recovery story, but it would also imply higher interest rates.
If it turns out that Omicron is more serious than expected, that’s bad news for the recovery, but it does imply a longer period of lower rates – except that it also implies a longer period of stagflationary disruption too.
Either way, it’s becoming harder to spin a good news scenario for overpriced assets. That’s why I’d suggest you stick with the cheaper ones.
