Omicron: game-changer or waiting game?

Despite some recent comments about omicron’s mild symptoms, the new virus variant appears to be a serious concern given its association with higher transmissibility and immunity neutralisation. While there is still much uncertainty about its other characteristics such as mortality risk, this news has the potential to be a game-changer for the near-term macro and market outlook - and should be treated as such. This is one of the risks we flagged in our latest 2022 outlook, aptly titled Catch-2022.

The speed of policy reaction has been notable with a number of countries imposing travel bans from South Africa within a matter of hours. Learning from mistakes in dealing with the delta variant, policymakers seem to be showing determination to act preemptively.

While it's possible (but far from certain) that the existing vaccines might still be effective or can be tweaked in a matter of weeks or months to fight the new variant, to limit its spread before this happens, more stringent domestic and international mobility restrictions might return as we head into the end of the year. The degree of stringency will likely vary across countries depending on the spread of the new variant and emerging new information on the degree of its vaccine resistance, but also on the political appetite to cause more economic damage or risk social unrest.

Global growth risks have already been skewed to the downside, with a slowing Chinese economy and global energy crunch as the key headwinds. The new virus variant adds further uncertainty to the macroeconomic and policy outlook over the next few months. With inflation likely to stay sticky at elevated levels, and further supply chain disruptions potentially pushing it even higher, central banks are facing an ever more challenging policy dilemma.

In the interest of protecting growth and labour markets, some hawkish rhetoric from the likes of the Federal Reserve and the Bank of England might have to be scaled back, at least until the new variant reveals its cards. For markets, this festive season might turn out to be more volatile than investors have been expecting, potentially creating opportunities in areas where valuations have previously appeared stretched.