The discovery of the new omicron coronavirus variant and the Fed Chair’s more hawkish tilt on tapering, rates, and inflation have injected volatility and fear into markets – but the outlook is uncertain.
Omicron Variant Fears
At the end of last week, the Republic of South Africa reported the discovery of a new coronavirus variant, named omicron. Daily confirmed coronavirus infections in South Africa have increased dramatically in recent days. Initial reports on the omicron variant suggested that the variant may be more inherently infectious than other virus variants, but the greatest concern was raised over its potential ability to infect vaccinated people due to the very large number of observed mutations in its binding system.
Many countries quickly moved to shut down travel from South Africa and other nearby African nations, but it was soon discovered that the virus is present in several countries, some of whom have observed community spread. While speedy measures have been taken to try to defend against the entry of the omicron variant, recent experience suggests it will likely be impossible to achieve.
This bad news arrived against a backdrop of increasing rates of coronavirus infections in Europe, where despite high levels of vaccination, daily new cases in some countries are reaching their highest ever levels. Some countries have brought back lockdown-style restrictions to combat rising infections.
Markets now face the question – how bad will omicron be? A South African governmental health advisor stated that the symptoms are typically mild, although this is far from certain, as South Africa has a low level of vaccination, so its data is hard to mine. The vaccines most used in South Africa also tend to have shown the lowest rates of clinical success in trials compared to other vaccine types.
The CEO of Moderna stated that he has no doubt that existing vaccines will have notably lower levels of success against preventing omicron infection.
Powell Hints on Earlier Taper, Inflation
In testimony before Congress yesterday, the Chair of the Federal Reserve Jerome Powell said that if the omicron variant does not have a strong negative impact, it would be wise to taper more quickly than has been planned. Powell also dropped his description of recent inflation as “transitory.” This is clear evidence that Powell’s monetary policy has been recalibrated to a more hawkish tilt, meaning that the Federal Reserve is likely to stop propping up the market with asset purchases and finally hike rates for the first time in years sooner than had been expected.
How Did the Markets React?
Both the initial news about the discovery of the omicron variant, the comments from Moderna’s CEO, and Powell’s testimony roiled markets. All sent stock markets lower. The Forex market reacted in a more mixed way. We have seen more volatility and more risk-off price movements, but the movements are neither very strong nor uniform across asset classes. The…
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