COVID-19 suddenly mutated the virus, making the whole world into panic again. Worried about a new Covid variant, the Dow fell 900 points on Friday, making it the worst day of the year. The S&P 500 fell 2%, and global stock markets were bloodied. The question now is how long will this supervirus variant last? How big will the impact be? In the face of the sudden mutation of the virus, overseas countries urgently deploy control. According to media reports, Israel announced on the 27th that it would close the border, becoming the first country to block the border for the prevention of mutants. The United States will impose restrictions on flights to eight African countries, including South Africa, due to the discovery of a new variant of novel coronavirus, US President Joe Biden said in a statement. In addition, Britain, Germany, Turkey and Russia have all made emergency controls.
Good need is that the world’s six vaccine giants are moving quickly over the weekend. Pfizer Inc and BioNTech said they expected more data from laboratory tests within two weeks at the latest. Adjust their mRNA vaccine within six weeks and start mass shipments within 100 days.
The transmission of subsequent Omicron variants and the effectiveness of vaccines are the key for us to judge whether the epidemic will escalate on a large scale and more serious than Delta variation, and whether policies require more stringent blockade measures, which in turn will affect the judgment of global supply and demand, different markets and different assets.
Considering that we may not rule out the possibility that the vaccine may not be effective and highly contagious when the Delta mutation broke out at that time, comparing the evolution path, impact characteristics and asset price performance of the Delta outbreak can at least provide some reference. We focus on the epidemic situation in India from March to May and the Delta epidemic in the United States and Europe from July to September. 1) from the point of view of transmission time, since the first Delta sample in October 2020, it spread widely in India from March to May, and from June to September, Europe, the United States, Southeast Asia and other countries caused the third wave of global epidemic, with an interval of about three months. 2) from the point of view of response time, there is an interval of about three months from the wide spread of Delta mutant virus to the acceleration of vaccination, the adoption of certain prevention and control measures, and the development of new vaccines.
The stock market has little impact. Both the Delta outbreak in India in March-May and the Delta outbreak in the US and Europe in July-September caused a brief one-off shock to the market (for example, when the Delta mutation escalated in the US on July 19, the S&P 500 index fell 1.6 per cent on July 19), but that was it. In the long run, it basically did not have much impact on the market throughout the escalation of the epidemic, and the same is true of the Indian stock market. Bond interest rates continue to fall, policy tightening expectations cool down. The interest rate on 10-year US debt fell at the beginning of the epidemic, falling to a low of 1.1% in early August, it benefited growth stock in tech sectors. In addition to the impact of the above asset prices, in the long run, the Delta variation has some medium-term impact on the global supply and demand pattern and different markets, which is worth using for reference.
The overall strength of the US dollar despite the escalation of the epidemic in the United States, other emerging markets have been hit harder by the lack of vaccine protection, thus widening the growth gap with the United States.
First of all, pay attention to the growth gap and capital flow gap caused by the vaccine gap. The Delta mutation virus widens the gap between developed and emerging markets, and some emerging markets, such as Vietnam, have to adopt stricter prevention and control measures due to lack of vaccine protection, which in turn has a further impact on production. While boosting China’s export demand, it has also widened the previous growth gap with the United States, which is also the main reason for the strengthening of the dollar.
The impact of the epidemic on the economy lies not in the epidemic itself, but in what policies are adopted to deal with it. Unlike emerging markets, the United States did not take any overall blockade measures during the second round of epidemic escalation from July to September, so from the actual effect, when the epidemic escalated most seriously in the United States, only travel demand was affected to a certain extent (such as the number of security checks), but local demand (such as dining out and entertainment retail, etc.) was basically undisturbed. In contrast, the impact of supply is significantly greater, such as the blockage of shipping and terminals, the shortage of some products such as car chips due to the escalation of the epidemic, the decline in capacity utilisation in the United States, and the decline in employment, especially in the service sector. This is also what needs to be paid attention to if the epidemic caused by the Omicron mutation escalates again.
The transmission of the subsequent Omicron variants and the effectiveness of the vaccine are the key for us to judge whether the epidemic will escalate on a large scale and more serious than the Delta variation, and whether the policy requires more stringent blockade measures, which in turn will affect the judgment of global supply and demand, different markets and different assets.
If the virus is effectively controlled locally in South Africa or only leads to temporary and minor upgrades in other regions, and the protection of the vaccine is still very effective, and the specific drugs can make progress as soon as possible. Then we do not expect that the second round of the epidemic will have too much impact on asset prices, the economy, the supply chain, etc., but it will promote the willingness to vaccinate and strengthen vaccination.
If the epidemic is only a repeat of the Delta mutation, that is, a systematic escalation of the fourth wave of the global epidemic, but vaccine development and vaccination as soon as possible can still protect against severe illness and death, then we expect that the disturbance to asset prices will also be manageable. However, as the market has accumulated more gains, the stock market may have some adjustment and volatility, bond interest rates will fall or remain low, the oil price will fall, and the dollar may still be strong.
At the same time, under this assumption, we do not expect developed markets to adopt more stringent blockades to suppress demand, but it may take longer, including employment and supply chain repair, which, at a time of high inflation, will also make monetary policy face relatively more difficult choices. By contrast, some emerging markets that lack vaccine protection are still likely to face more pressure.
If the mutated virus is more contagious and lethal, and the vaccine is basically ineffective. Then the impact on both supply and demand and asset prices may be more serious and lasting, but this situation may also be too pessimistic at present. We believe that current governments and pharmaceutical companies are more responsive and have accumulated more experience in response and vaccine development, higher vaccination rates (many countries still face undervaccination at the time of the Delta outbreak), and advances in the development of specific drugs are likely to be better prepared to deal with new variants of the virus.
Nevertheless, with the arrival of the new industrial cycle, there is no shortage of structural market opportunities such as Metaverse. The segment is still in its infancy, but the money can’t wait to be laid out. Bloomberg estimates that the market could be worth USD800 billion by 2024. Exchange traded funds (ETF) are set to benefit. South Korea’s four new Metaverse related ETFs is among the fastest-growing funds of its kind, with two of them growing by USD100m in assets in two weeks. Meta ETF assets may exceed USD2 billion by the end of the year.
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