Fed shifts gear despite Omicron variant

Key takeaways

• The impact of the Omicron Covid variant may delay, but not derail, economic recovery
• The Fed plans to accelerate asset tapering as labour markets continue to mend
• OPEC+ exporters are pressing ahead with a production increase
• We expect economic activity and earnings to continue supporting risk assets.

On 26 November, the World Health Organisation designated Covid’s Omicron a ‘variant of concern.’ Amid uncertainties over the new variant’s severity and market volatility, the US Federal Reserve said it plans to accelerate asset tapering and oil exporters reiterated a commitment to boost production. We believe that another economic disruption would delay, not derail demand, leaving growth, jobs and corporate profits less affected.

The Omicron variant incorporates as many as 50 genetic mutations that may change the Covid virus’ behaviour. Better understanding of its severity “will take days to several weeks,” the WHO wrote on 28 November. The latest variant was first detected and reported five days earlier by virologists in South Africa and Botswana. There is no estimate yet of whether the variant creates a more severe form of the disease, nor whether current vaccines are effective.

In response to the WHO’s classification, the fourth ‘variant of concern’ since the start of the pandemic, stock markets recorded their biggest single-day fall since the last was labelled ‘Delta’ on 11 May 2021. News of each of the Covid variants have driven volatility before markets recovered. Provided vaccines prove effective against Omicron, the current path to recovery should not be interrupted by this latest version. In addition, economies are becoming more efficient at coping with interruptions, whether logistical or remote working. The S&P 500 remains almost 24% higher than its opening at the start of 2021, and Brent crude oil has gained 28% year-to-date.

The Omicron variant has already increased economic uncertainty and short-term volatility as markets attempt to price the threat to the economic recovery. Many governments have reacted with additional restrictions, including travel bans, lockdowns or are mulling compulsory vaccination programmes where take-up has been low.

BioNTech Chief Executive Ugur Sahin, whose firm partnered with Pfizer to produce the first Covid vaccine, said last week that “it’s likely” that its jab will provide “substantial protection against severe disease caused by Omicron.” Moderna, another Covid vaccine maker, has said that it is working on two boosters “designed to anticipate mutations such as those that have emerged in the Omicron variant.” Dr Sahin told Reuters that Pfizer and BioNTech have tweaked their vaccine to target the Alpha and Delta variants, and this experience should help to accelerate a regulatory approval process if needed. In addition, GlaxoSmithKline and Vir Biotechnology announced last week that one of their therapies shows promise against the new variant.