A sharp spike in fear relating to a new Covid-19 variant (“Omicron” or B.1.1.529) identified in South Africa has triggered one of the worst Black Friday corrections on record.
In only a few short days, events have escalated remarkably quickly. The World Health Organization (WHO) labelled Omicron as a variant of concern, cases have been uncovered in Europe and Asia, and governments globally are going on high alert to protect their populations.
Markets sold off sharply last Friday as the S&P500, Euro Stoxx 50 and Nikkei Index fell by 2.3%, 4.7% and 2.5%, respectively. Oil prices plunged, as Omicron sparked fears of the return of travel restrictions.
US WTI crude futures ended Friday 13.1% lower at USD68/barrel, while Brent crude fell 11.6% to USD72/barrel. Share prices of refiners, rig owners, pipeline operators and oil producers all fell sharply as well – energy was the worst performing sector in the S&P500 on Friday, down 4% compared with the 2.3% decline in the index.
Investors also appeared to fall back on last year’s Covid-19 playbook, with work-from-home beneficiaries such as Zoom and Peloton up 5% while economic re-opening plays such as airlines were down ~6%. Cyclicals like financials, and energy, travel and leisure caused the Stoxx Europe 600 to fall by 3.7%, its worst day since June 2020.
The 10-year US Treasury yield fell from 1.63% before Thursday’s Thanksgiving holiday break to 1.47% on Friday, the biggest drop since March 2020 as investors rushed into safe havens.
Gold prices swung between gains and losses, surging from USD1789/oz to as high as USD1815/oz, then falling to USD1785/oz and rebounding again to end the day at USD1,803/oz.
The US dollar index (DXY) fell by 0.7%; the US dollar weakened ~1.7% against the Japanese yen, ~1.4% against the Swiss franc and nearly ~1% against the euro.
What do we know about the new Covid-19 variant Omicron?
Details are still emerging. The Covid-19 variant B.1.1.529, now known as Omicron, was first detected in samples collected on 11 November 2021 in the African nation of Botswana, and subsequently in samples collected on 14 November and after in neighbouring South Africa, according to a risk assessment published by the European Centre for Disease Prevention and Control on 26 November. A separate statement by the WHO the same day indicated that the first known confirmed Omicron infection was from a specimen collected even earlier, on 9 November.
On 25 November, Hong Kong confirmed its first two cases infected with the new variant. On 26 November, New York declared a state of emergency due to a sharp rise in overall Covid-19 cases and the threat posed by Omicron, although the new variant has not yet been detected in the state.
Israel, which detected its first Omicron case on 26 November, said it would ban all foreigners from entering the country for 14 days, pending more information about the new variant. Morocco said on Sunday (28 November) that it would stop all incoming air travel for two weeks.
New Omicron infections have also been detected in other parts of the world including Australia, Germany, Belgium, Italy, Denmark, the Netherlands, Israel and the United Kingdom. Multiple countries have also suspended flights to and from South Africa, Botswana and several other southern African nations, or tightened restrictions on travellers arriving from these countries.
The WHO has classified Omicron as a “variant of concern”. What does that mean?
On 26 November, the WHO classified Omicron as a “variant of concern”, highlighting that the evidence so far indicated “a detrimental change in Covid-19 epidemiology”.
“Preliminary evidence suggests an increased risk of reinfection with this variant, as compared to other variants of concern. The number of cases of this variant appears to be increasing in almost all provinces in South Africa,” the WHO said.
According to the WHO’s multi-stage classification system, a new variant is considered a “variant of concern” if it is associated with one or more of these changes at a degree of global public health significance:
A variant of concern would also meet the conditions for a “variant of interest”, a lower-level classification for any Covid-19 variant
Is Omicron more transmissible than other Covid-19 variants?
Scientists are particularly concerned about Omicron because the variant has over 30 mutations on its ‘spike protein’ – the part of the virus that helps it infect human cells – that are typically associated with antibody evasion. The spike protein is also targeted by existing mRNA vaccines made by Pfizer-BioNTech and Moderna.
However, Omicron’s mutations also mean it can be detected by existing polymerase chain reaction (PCR) tests already widely in use, making it easier for healthcare authorities to identify new cases.
It is still uncertain how the mutations in the Omicron variant affect how quickly it spreads, the severity of symptoms in infected patients, and whether it could bypass immune protection provided by existing vaccines or past Covid-19 infections – some of the key questions that scientists are racing to answer.
Early data suggest that the Omicron variant is dominating new infections in South Africa, outcompeting the Delta and other variants (Exhibit 2).
Over 80% of the 3,220 new Covid-19 cases reported across the country on 27 November were from Gauteng province, according to the latest update by South Africa’s National Institute for Communicable Diseases, with a similarly high concentration in the province in recent days.
An analysis of 77 Covid-19 virus samples collected from Gauteng on 12-20 November found that all 77 were caused by the Omicron variant, according to Tulio de Oliveira, Director of the Centre for Epidemic Response and Innovation in South Africa.
The large number of mutations present in Omicron and its rapid spread within South Africa’s Gauteng province has prompted authorities worldwide to announce precautionary measures to prepare for new outbreaks within their own borders.
The next 2-3 weeks will be able to shed more information on the transmissibility of this variant as we will get information on whether this strain will overtake Delta in the countries that are experiencing a high rate of Delta variant infection.
Is Omicron more severe than other Covid-19 variants in terms of hospitalisation and death rates?
The race to understand the Omicron variant is now on, both in terms of its real-world impact on hospitalisation and death rates, as well its response to the existing antibody therapies and vaccines.
It could take 6-8 weeks for the impact on hospitalisation rates and deaths to become clear, based on past experience with the Delta variant. However, South Africa’s early reporting of the new variant discovery and the WHO’s subsequent classification of Omicron as a variant of concern have been much faster than when the Delta variant started to emerge in India, and the precautionary actions now being taken by countries around the world could slow any potential rise in hospitalisation rates and deaths due to Omicron, extending the timelines outlined above.
Are existing vaccines effective against Omicron? If not, when can new vaccines be developed and manufactured?
Laboratories in South Africa, Europe and US have started to study Omicron’s “immune escape potential” (likelihood to be neutralised by antibodies) in the laboratory setting. The process to engineer pseudoviruses of Omicron to study the neutralisation by vaccine serum and in previously infected patients (i.e. those with antibodies) is expected to take 2-4 weeks.
“Based on our understanding of the mutations in this lineage, partial immune escape is likely, but it is likely that vaccines will still offer high levels of protection against hospitalisation and death,” South Africa’s National Institute for Communicable Diseases said in a statement on 26 November 2021.
One of Hong Kong’s confirmed cases in a quarantine hotel is a Pfizer double-vaccinated patient, raising alarms. However, this could be explained by the decline in immunity rather the resistance of Omicron to the vaccine, as the patient had received their last shot 5 months ago.
BioNTech SE which partnered Pfizer to develop the most-used Covid-19 vaccine has said that it will have data on how Omicron interacts with its vaccines within 2 weeks. It also said that it will be able to adapt the vaccine within 6 weeks and start shipping batches of the new vaccines within 100 days of sequencing virus, if necessary.
Pfizer also told an analyst earlier last week that it would be able to deliver 4 billion doses of new vaccine within 12 months after sequencing.
Separately, Moderna announced that it was taking a few parallel approaches to address the Omicron variant. First, it would study whether a higher dose of booster of its vaccine would be able to neutralise the Omicron variant. It would also be looking at multi-valent booster candidates that are designed to anticipate mutations, as well as an Omicron-specific booster candidate. The flexibility of the mRNA platform allows for faster transition to produce a new vaccine, if necessary.
Roche Holding, which together with Regeneron Pharmaceuticals produces Ronapreve, the main antibody drug given to patients who are unable to produce an immune response, said that it would be studying the new variant.
GlaxoSmithKline, which also has a Covid antibody (in partnership with Vir Biotechnology) said that it is awaiting laboratory confirmation on the efficacy of its treatment against the latest variant.
Other therapeutics options include experimental antiviral drugs, such as the ones being developed by Pfizer and Merck & Co. Antiviral treatments are aimed at attacking the virus to prevent it from multiplying, and the large number of mutations of Omicron’s spike protein does not render the antiviral ineffective.
In October, Merck announced that molnupiravir, its experimental Covid-19 pill, was 50% effective and it filed for emergency use authorisation. However, the US Food and Drug Administration (FDA) announced last Friday (26 November) that the final analysis showed that the pill was only 30% effective, and FDA staff raised questions about potential side-effects of the drug. The external panel of advisors to the FDA will be meeting on Tuesday (30 November) to vote whether molnupiravir should be recommended to be cleared for use.
What are the implications on investment strategy?
As it will take several weeks at least for the market to determine Omicron’s nature while policy makers take further measures to prevent its spread, we expect a heightened scope for short-term market volatility over this period.
As such, investors should review leverage and margin risks, and strengthen portfolio resilience through diversification, downside management and hedges into safe havens such as Gold, the Japanese Yen and the Swiss Franc.
Importantly, investors should not react emotionally to the situation and panic-sell core positions in reaction to the rise in market fear. It will be counter-productive to attempt to time the short-term market swings ahead.
At this juncture, we make no changes to our asset allocation stance (Exhibit 3) as we assess that the long-term outlook remains fundamentally intact.
While the spread of Omicron and the heightened restrictions will be a setback to growth, we do not believe it will derail the broad post-pandemic recovery.
First, policy makers remain on high alert to support the economic recovery. In response to Omicron-related uncertainties, we believe that the odds of the US Federal Reserve increasing the pace of taper at the December FOMC meeting has decreased. The market-implied odds also signal that the Fed’s rate hikes are moved back. These are dovish developments and are positive for market liquidity conditions.
With Fed Chairman Jay Powell recently appointed to a new term, he has a strengthened mandate to hold to a dovish stance and err on the side of caution if that is required.
Second, we believe it is unlikely that the Omicron variant will have an adverse impact identical to Covid-19’s initial surge in March 2020.
Policy makers are by now far more prepared to address similar risks and uncertainties. Despite the likelihood of increased restrictions ahead, the political appetites for full shutdowns in developed markets are much lower.
Even in the worst-case scenario that current vaccines are ineffective, vaccine makers have already indicated that new vaccines can be ready at significant scale by early 2022. In this scenario, we would expect monetary and fiscal support to come into play to bridge the anticipated economic air pocket.
Third, liquidity in the market remains abundant, especially if the Fed opts against increasing the pace of taper in its December FOMC meeting.
Friday’s sharp correction took place on the Thanksgiving Holiday in the US when there is historically limited trading activity, which may have exacerbated the downward move.
As the markets have learnt from the March 2020 correction, liquidity factors play a key role driving asset prices. In the event of a sharp correction, investors cannot rule out a V-shaped price recovery even as the economic activity and earnings are impacted for a period of time.
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