Macro Insights Weekly: Another coronavirus mutation scare
- Early data have justifiably alarmed policy makers, eliciting almost-immediate response
- The market’s reaction was a reprise of every time this pandemic has taken a turn for the worse
- The policy dimension is however unlikely to follow a typical pandemic surge
- A large-scale fiscal and monetary response is not feasible
- Slowing down the pace of normalisation may be the only option
Over the last couple of trading sessions, global markets have turned decidedly defensive as the B.1.1.529 strain (named Omicron) of the SARS-Cov-2 variant has become a source of concern. Spreading presently, at an alarmingly rapid pace, in Botswana and South Africa, the strain appears to be even more transmissible than the Delta variant, based on sequencing data of cases tracked so far.
There are three areas that scientists are focus on virus mutations—(i) what is the viral load of the infection; (ii) how easily does the strain bind with body’s cells in the respiratory system; and (iii) can it evade the body’s immune defenses.
The hope is that substantial progress in vaccination worldwide will limit the mutations, but ironically, as immunity is built up, the possibility of a mutation that erodes vaccine efficacy also rises as the virus faces the choice of evolving or going extinct.
Early data have justifiably alarmed medical health professionals and policy makers, eliciting almost-immediate response, choosing to err on the side of caution. We can expect that some of the recent easing of mask mandates, testing, and quarantine will be reversed, at least for a few weeks till the lethality of the Omicron variant is established. Tests are taking place in major labs worldwide to also see the extent which can break-through the immune defence system, especially if built up through the vaccination process. A strain that is not combatted adequately by current vaccines would be worrisome, resulting in waves to stringent measures on mobility until effective boosters with new formulations are developed.
This is where the challenge lies—the weeks necessary for medical professionals to gather the requisite data, carry out their analysis, and craft an adequate response to the latest chapter of this pandemic would be marked by uncertainty for both policy makers and markets. Countries may even go so far as to reinstate travel bans to contain the spread of the Omicron strain, but past experience already show that this would likely be futile. A pandemic’s global dimensions are all but impossible to ignore, as country after country with remote location and/or prolonged policy stringency have found to their regret. May the key reminder from the Omicron spread would be to recognise the need for a globally synchronised response to the pandemic.
Friday’s market response was along the lines of selling re-opening stocks and commodities, buying pharma and home office equipment and services producers, rushing for government bonds and the US dollar, cutting back on speculation (including cryptos), and shying away from the in-vogue reflation trade.
This market reaction could be seen as basically a reprise of every single time this pandemic has taken a turn for the worse. The policy dimension is however unlikely to follow a typical pandemic surge. Unlike the past episodes, governments are not going to jump in large scale support measures, given the prevalence of high debt and inflation at the current juncture. They may be compelled to slow down the pace of normalisation, as anticipated by the fixed income market’s rapid paring back of rate hike expectations in 2022 and beyond.
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