Concerns about tail risks mounting but early signs for Omicron is encouraging

As we noted in our last publication, dark clouds are appearing for global stock markets for next year as the prospect of the US Fed pivoting towards a more hawkish stance looked more likely. Chairman Powell’s latest communication where he backtracked on his long-standing view that inflationary pressures should prove transitory left little doubt that the central bank’s monetary policy will be tightening at a much quicker pace in 2022. Although far tamer inflationary pressures in Japan leaves BOJ unlikely to alter its ultra-loose monetary policy, we suspect the ECB will follow the US by signalling a less accommodative policy stance in the coming weeks. 

Moreover, as geopolitical tensions regarding China are visibly mounting with delisting of Chinese ADRs having begun while US lawmakers’ calls to discourage investments in the region is only getting louder, China bulls’ hopes for cooler heads prevailing for the sake of business have been severely dashed. Indeed, we continue to think a second cold war is unlikely to be averted as the growing ideological divide between the West and China leaves little room for reconciliation.

Thus, we continue to expect a notable disruption to global trade with technology being the epicentre of tougher export controls to come. The link below is to our late October note which addresses this in more length:

Although the emergence of Omicron has dealt another blow to market sentiment and has led to reintroduction of some travel restrictions, preliminary reports from South Africa seem to suggest that the disease is proving to be milder but a more contagious form of Covid than the Delta variant. Also, the high number of mutations in the pathogen could explain the most recent spike in re-infections in the region. If so, then it is logical to assume that the current Covid vaccines could indeed prove less effective against the new variant.

However, higher transmissibility but more milder symptoms would also loosely follow the pattern observed with the Spanish flu a century ago which fizzled out after about two years. If these early findings hold true and potentially a less lethal variant manages to nudge Delta out of existence, then this could indeed be the beginning of the end to the pandemic, regardless of whether more targeted vaccines are developed in time. We should hopefully have more definitive data in Omicron’s lethality within the next fortnight but early signs are actually encouraging.