With the news media full of reports on the emergence of a ‘nu’ Covid-10 variant in Southern Africa, George Lagarias, chief economist at Mazars shares his views on the outlook for 2022
What is happening in markets and why?
“On Friday morning equity and bond markets reacted negatively to news that a Covid-19 variant in South Africa could potentially lead to a new outbreak of the pandemic, even amongst vaccinated populations.
How did markets react?
“The response prompted a significant sell-off in equity markets early on Friday, with Dow Jones futures losing 800 points (-2%). Around midday European markets were down around 3%-3.5%. Meanwhile, bond yields climbed, oil prices (which include a fair amount of speculation) fell by 6%, and gold gained 1%. This is a classic ‘risk-off’ episode, the largest in about thirteen months.
What do we believe?
“At this point, to make a determination whether markets are overreacting or not is nearly random.
“From a science perspective, we acknowledge that very little is definitively known. It will take time before its full impact and potential imperviousness to vaccination is assessed.
“The move to quickly close the borders, which prompted the selloff, was a relatively easy one to make. Travel from sub-equatorial Africa to the west is fairly limited, and policymakers don’t have to worry much about the impact on the supply chain and trade relations. Ebola outbreaks have prompted border closures before.
“Also, we need to acknowledge two market mitigating factors:
- “One, the risk-off event is happening on the Friday day after Thanksgiving when the US market (and many European trading desks) work on skeleton crews, so trading volumes are probably lower than usual. We have to wait for the next few days and for traders to return to their desks to assess whether this correction has legs.
- “Two, it takes place at the end of the US earnings season and the closure of books for hedge funds and prop desks. Central banks are turning more hawkish on inflation concerns, and “just a couple of days ago the Fed said it might speed up the timetable for ending this round of asset purchases. Global stocks have already gained almost 21% year-on-year, and even if the event hadn’t happened, it would not have been the worst time for market participants to take some profit off the table.
“Meanwhile, what we do know is that 2022 is not 2020. Countries are better prepared and have mechanisms in place to stop and track infections. Austria, Germany and Italy have already stepped up stringency measures to protect against the Delta variant. Along with vaccines, there is now also medication available with Merck and Pfizer preparing to circulate pills to treat Covid early in 2022. Leaders are also prepared to take on even more debt to support the economic sectors in pain.
“From a business perspective, hybrid working has allowed for many activities to go uninterrupted. However, further pressure on supply chains could have a significant impact on economic activity and inflation, making this an even harder winter. As a society, we have learned to live with this virus. Another, more vaccine resistant variant will slow the recovery but its impact would have to be devastating to bring us back to square one.
“Apart from the science, we will also be closely monitoring the response of policymakers, especially if the downturn worsens.”