Not much is yet known about the Omicron coronavirus variant, which is spreading faster than its predecessors. Only in the next two weeks will the picture become clearer, and we will be able to know the extent of the spread and whether current vaccines provide protection against the new variant. Meanwhile, despite the experience accumulated since March 2020, uncertainty reigns on the financial markets.
Last Friday saw thin trading in New York because of the Thanksgiving holiday, and perhaps for that reason it was especially violent. The price of oil fell 10%, and the fear index (VIX) shot up by more than 50%, while markets around the world recorded their worst day of 2021, after double-digit rises over the past year that was supported by a determined, and unprecedented, response to the crisis that broke out in March 2020.
Investors do not, however, expect to see rises when trading opens tomorrow, since Covid-19, with all its variants, is still with us. Even before Omicron became the word on everyone's lips, additional restrictions were being imposed in Europe because of the Delta variant, and now the new variant adds further uncertainty to the situation, which has translated into sharp market declines.
The panic on the part of investors on Friday reminded some of them of March 2020, but with a difference. Omicron has caught central banks at the point at which they were intending to start to cut back on the huge support they have been injecting into the financial market since the coronavirus pandemic began. But if anything can be learned from the period at the start of the crisis, it is that the central banks will to everything to prevent a market crash. And even if it happens, they will do all that's required to get the economy back on track, even if it means printing a third of the dollars in the world, despite the fears of inflation.
So what is all the panic about?
The central banks come to this point with little ammunition. Interest rates are near zero, bond purchasing programs (quantitative easing) are coming to an end, and stock markets have been through a huge boom. Continued injections into the financial markets while inflation threatens to get out of control do not look like an attractive recipe for the economy. Further lockdowns and restrictions around the world, which have already translated into a fall in the oil price, are liable to heap further difficulties on global supply chains that are already struggling to get back to normal. And so, if the demand side survived the coronavirus crisis well, more disruption on the supply side is the last thing we need.
So what can the central banks still do? It can't be said that they were rushing to celebrate the exit from the coronavirus pandemic. If anything, the opposite is the case. The criticism was that they were keeping up support for the markets for too long, and that that was liable to create distortions in the economy. Now, along comes a new variant that vindicates the central banks. In its latest interest rate announcement, the Bank of Israel warned of the risk of a new variant developing. The Bank of Israel's announcement said that the economy was still facing challenges as health risks mounted, and so the Monetary Committee would continue to conduct a very expansionary policy "over time". The financial markets had priced in an interest rate rise sometime next year, but that seems to be receding, and the support programs can be extended.
It's not just in Israel. In the US, if last week the market was pricing in almost three interest rate hikes in 2022, starting from June, now it is pricing in just one rate hike, and that from September. The central banks can extend their support programs for the financial markets, and that means that if some members of the US Federal Open Market Committee were disposed to accelerate tapering of asset purchases, the new variant is likely to change their minds, and tapering may be even more gradual than planned, which could provide more fuel for the stock markets.
Point of light
The World Health Organization has defined Omicron as "a variant of concern" because of the rapidity with which it has spread. But it is possible to derive some optimism from the updates of the companies that have already brought vaccines to the market, such as Moderna and Pfizer. If the vaccine is proof against the Omicron variant, fine. If not, Pfizer and Moderna have already issued optimistic estimates of their ability to make changes in the vaccine within six weeks and to start distributing the modified vaccine within 100 days.
It looks as though tomorrow will be the test for the markets, when trading opens overseas, indicating whether the trend in the indices of the past few months will reverse. Without the new variant, the main risks were over how central banks would respond to inflation, with some having already started to raise interest rates. It's hard to talk about interest rate hikes now, as the ball goes back to governments, which will have to decide how patient they can be before introducing lockdowns and restrictions, in accordance with the effectiveness of the vaccines.
Published by Globes, Israel business news - en.globes.co.il - on November 28, 2021.
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