Copper prices fell about 4 percent, but the gold price was stable, signaling that the emergence of Omicron has at least for a moment overwhelmed concerns about furious inflation rates, which had increasingly dominated the discussion on economic conditions this year.
For markets, this is an important bid for what happened last week.
Where it was given that the Fed would settle its $ 120 billion ($ 168 billion) a month in bond and mortgage purchases by mid-next year and pave the way for the first rate hikes in the post-pandemic cycle – with other major ones central banks moving more or less side by side – Omicron has abruptly changed that belief.
The newly appointed Fed Chairman Jerome Powell and his new senior deputy, Lael Brainard, are both relatively “pigeon-like” (Brainard even more so than Powell) and are likely to take a cautious response to the looming new mutation of the virus.
Where the Fed’s minutes of the most recent meeting a week ago showed some discussion about speeding up the phasing out of its asset purchases to pave the way for an earlier than previously planned first-rate rise, the discussion will now be about whether to slow down or stop the downsizing despite the persistently high level of US inflation (and similar experiences elsewhere).
It is the prospect of more shutdowns and other economic disruption measures that has frightened markets and will give central banks, other economic agencies and governments a significant pause for thought.
Relatively high vaccination rates in the developed world, a better understanding of COVID and well-developed responses over the past 18 months mean that the world is somewhat better prepared for a dangerous mutation than it was when the pandemic started.
Markets were initially very sensitive to COVID-related developments, but as vaccination rates in the developed world rose, investors – yes local communities – had become more and more blasé about the threat. That all changed last week.
Similarly, governments and their central banks have used most of the fiscal and monetary firepower they had for their initial response to COVID.
The chronic supply chain disruptions, which have been a factor in the largest increase in inflation rates for more than 30 years, will be exacerbated by Omicron if the worst fears of the variant are realized, creating a new and very difficult to reconcile mystery for economic agencies trying to balance the balance between growth and sustained high inflation.
China’s “COVID-zero” approach to COVID, which in itself is a key factor in these supply-side disruptions, could mean an even greater shortage of goods, if there is any indication that the mutation has gained a foothold in its local community.
The sectors hardest hit by the pandemic – restaurants, entertainment, accommodation and travel (especially aviation) – had only just begun to recover and resume services. Another series of lockdowns would be devastating, and not just for the stock prices of the listed entities.
For the U.S. stock market, which is trading about 36 percent higher than it was before COVID (our market is broadly in line with the level before COVID), the new outbreak is looming.
There was little about any downward risk priced into the market before last Friday; not even a realization that US monetary policy had begun to change and would gradually shrink the huge bulge of liquidity that the Fed has been pumping into the US financial system since March last year.
With a lot of retail and first-time investors in the market, many of them attracted to fee-free brokerage firms like Robinhood and trading margin or playing with call options, there is potential in the US – and elsewhere, given the US market plays a role in the global markets – because something quite unpleasant can happen if the Omicron variant proves to be as transmissible and the effect of the vaccines against it as weak as some immunologists fear.
What the emergence of the latest variant does is to remind everyone that there is no smooth path to the “COVID normal” that was previously foreseen.
Markets were initially very sensitive to COVID-related developments, but as vaccination rates in the developed world increased, investors – yes communities – had become more and more blasé about the threat. That all changed last week.
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