On Friday, the fear factor dominated the markets. A new and potentially highly contagious COVID-19 variant was making the rounds just when hopes were high that the pandemic, three months short of its second anniversary, was losing its destructive powers.
On Monday, the sell-off was over, replaced by cautious optimism. Equities and oil rose, reviving a pattern that we have seen many times before. As ING Economics put it, “What the latest round of market movements confirm is that markets tend to overreact to bad news, but then to cling on unrealistically to any glimmer of hope that enables them to rally.”
Monday’s rally was undeniable if hardly robust. U.S. crude oil, having lost 10 per cent on Friday, rose 2.6 per cent to US$69.95 a barrel. The S&P 500 closed up 1.32 per cent with tech stocks leading the rebound; the S&P/TSX Composite Index gained by a mere 0.11 per cent. The pan-European Stoxx 600 index rose 0.69 per cent.
The glimmer of hope that investors seized upon? Not much, as it turned out. Anecdotal evidence suggested that Omicron, as the new variant is called, may be more infectious than the prevalent Delta variant but not necessarily deadlier. John Swinney, deputy first minister of Scotland, told the BBC that “there is no evidence of serious illness” among the six people in Scotland known to have contracted the Omicron strain.
On the surface, that seems like good news. The bad news is that some of the cases identified in Scotland were not linked to foreign travel – Omicron was first identified in southern Africa – meaning it’s spreading in the community. It’s also spreading in a community that supposedly has high immunity, because it is highly vaccinated. According to the Bloomberg Vaccine Tracker, almost 70 per cent of the British population is fully vaccinated and more than 22 per cent have had their booster shots. Only a few countries have more successful jab rates.
Anecdotal evidence is pretty much meaningless, precisely because it is anecdotal, that is, not scientific.
Investors would like to know right now whether Omicron symptoms will always be mild, and kept that way by the existing crop of vaccines, so they can get back to driving up markets, just as they did last summer, when the Delta variant became the dominant strain globally. When investors realized that Delta, while highly transmissible, would not turn into a mass killing machine and that the vaccines were effective in preventing severe disease, they pounded the “buy” buttons again.
Omicron cases have been confirmed in more than a dozen countries, from Canada to Australia, but the number of known cases is still far too small to get a proper read on the variant. The World Health Organization, evidently aware of the mistakes it made in waiting until mid-March, 2020, before declaring a global pandemic, said on Monday that the global risk of the variant “is assessed as very high.”
For his part, U.S. President Joe Biden offered reassurance by saying Omicron-related lockdowns were off the table for now and that the variant was no reason to panic.
We do not know yet if the existing vaccines will protect us against Omicron in the same way they protected us against the Delta variant. BioNTech, the German biotech company that developed a highly effective mRNA vaccine with Pfizer, said it needs two weeks to study Omicron to determine whether the strain is a clear and present danger to global health – and the economy – or just another variant that will be relegated to the footnotes of pandemic history.
Even if Omicron is proven to be dangerous, investors are likely to seize upon the dazzling speed at which mRNA vaccines can be tweaked to fight it. They may be right about that, but they would be dead wrong to believe that any new vaccines would be rolled out globally in a hurry.
The distribution history of the first generation of vaccines is hardly encouraging and exposed massive inequalities. Wealthy countries got them first, poor countries last. Global vaccine production is about 1.5 billion doses a month, but large portions of the planet remain largely unvaccinated. In Africa, population 1.3 billion, only 7 per cent are fully immunized. In Nigeria, less than 2 per cent are fully vaccinated. (In Canada, about 77 per cent have had two doses.)
Could the same pattern be repeated with an Omicron vaccine? Absolutely yes, in which case returning to pre-Omicron life would be impossible for many months, maybe a year or longer. In the meantime, some countries might treat the Omicron-infused pandemic as an endemic, that is, something that can be endured without travel bans and other restrictions; others will not take any chances and shut down the whole show.
Already Japan and Israel have banned international travel and lockdowns may come back in vogue. Austria went into full lockdown a week ago, before “Omicron” entered the disease lexicon. Australia is delaying the next stage of its reopening, and mask and testing mandates are coming back in many countries. Flight bans have effectively cut off southern Africa from the rest of the world.
All of these precautions will delay the economic recovery and may stop it in its tracks if Omicron proves to be dangerous. Investors had a good day on Monday, clawing back some of their losses. Their optimism may or may not be misplaced; it certainly seems premature.
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