OMICRON POINTS TO AN INCREASINGLY FRAGILE MARKET
Last week, reports of a new, potentially more contagious variant of COVID-19, labeled Omicron, sent markets into a tailspin and government bond yields plummeting. Parts of Europe were already facing lockdowns from Delta, and rising infection rates across the globe were already pointing towards another surge.
Yet, such a violent market reaction when so little is known about Omicron highlights the fragility of the optimism that had recently driven markets to new highs. Omicron represents the true uncertainty we wrote about a couple of weeks back. While there is a limited amount of information about Omicron’s infection rate, the effectiveness of current vaccines and other prevention methods won’t be known with any reliability for several weeks. The inability to assess the probability of outcomes, even subjectively, made markets assume the worst.
The reaction to Omicron shows that the market has little resilience to bad news, whether or not this new variant turns out to be more dangerous than the Delta variant. An extreme bounce-back from the lows would only reinforce how uncertain sentiment remains. With market conditions this fragile, we have to hope for good news on all fronts, not just about Omicron, if the post-lockdown rally is to continue.
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