research conclusion
On November 26, the fermentation of Omicron variant of covid-19 virus in South Africa was discussed. After the news landed, European and American stock markets generally fell, WTI crude oil fell 12%, and the yield of 10-year US bonds fell 15bp.
In the face of the virus mutation that hit again, the market hastily priced the panic and impact brought by the virus. However, experience tells us that the impact of the variation of virus strains on large categories of assets may not be deduced according to the path and direction we take for granted. Considering the current core market contradictions such as inflation and monetary policy contraction, we may need to reassess the market impact of this round of strain variation.
Fact: in the impact of mutant strains, risk assets actually perform well. Delta strain mutation also triggered panic in financial markets in the initial stage. However, from the perspective of the epidemic development cycle of the mutant strain, the performance of risk assets is not poor, the main global stock markets closed up, the yield of US bonds fell, and gold and crude oil fluctuated.
There is little marginal change in the strength of epidemic prevention policies in overseas countries, and the impact of the new epidemic on fundamentals is limited. The direct impact of the epidemic on the economy can be divided into two dimensions: the negative impact of the tightening of epidemic prevention policies on production and consumption, and the negative impact of the epidemic on the marginal tendency of individual and enterprise production and consumption. Among them, the tightening of epidemic prevention policies has the most rigid constraints on the economy. However, we have observed that since the outbreak of the first wave of the global epidemic and the global resumption of work and production cycle from May to June 2020, most overseas countries have not systematically adjusted the epidemic prevention policies to the strength of the first wave of the epidemic. In several rounds of epidemic rebound, most countries only chose regional and structural tightening epidemic prevention policies, which had a temporary impact on economic recovery.
More importantly, the impact of the mutant strain shook the expectation of monetary policy tightening. Due to the limited impact of the epidemic situation of mutant strains on economic fundamentals, its impact on market expectations will play a major role in market pricing during the epidemic period. Specifically, the emergence of the mutant strain will suppress the market's expectations of inflation and economic prospects. The uncertainty caused by the mutation of the strain will cool the market's expectations of monetary authorities tightening monetary policy. The above factors eventually led to the impact of mutant strains, which brought downward pressure on interest rates and boosted the rise of risky assets when the marginal policy expectation turned loose.
In the last round of delta, as the benchmark interest rate of asset pricing, the yield of 10-year US bonds showed a coincidental trend with the epidemic: when the epidemic spread from July to August, the yield of US bonds decreased; From August to September, the epidemic peaked, and the yield of US bonds rose sharply. There are many factors affecting the trend of interest rate, but the impact of the epidemic on economic expectations, inflation expectations and monetary policy expectations has played an important role.
High inflation and the expectation of raising interest rates are the core contradictions facing the current market. 8. Since September, overseas interest rates have risen again, behind which are constantly higher than expected inflation data, boosting inflation expectations and rising interest rate expectations. After the emergence of Omicron mutant strain, new variables were introduced, and inflation and interest rate hike expectations were obviously impacted by the mutant strain. If the oil price continues to decline due to virus concerns, it will significantly suppress the current inflation expectations of the market. In terms of monetary policy expectation, the number of interest rate increases implied in the pricing of federal fund interest rate futures decreased significantly, indicating that the logical chain of mutation virus impact - rising uncertainty of economic repair - marginal loosening of monetary policy expectation is established.
Conclusion: the main market impact of Omicron strain variation will still come from the impact of the epidemic on the market expectation. The uncertainty of the economic outlook brought about by the epidemic will impact the current high inflation and interest rate hike expectations, which will bring downward pressure on interest rates. Once the expectation of raising interest rates wavers, the US dollar index will also be under pressure, and gold may continue to rebound due to the suppression of real interest rates. Most importantly, for risky assets such as stocks, considering that the current market is mainly facing the test of inflation and monetary policy contraction, when the virus mutates into expectations and new variables are introduced, it is not easy to bearish the performance of risky assets in the future.
Risk statement
The epidemic scale caused by Omicron mutant strain exceeded expectations; The epidemic situation further worsened the gap between supply and demand; The trend of monetary policy is restricted by inflation and other factors.
