News of a new Covid strain of concern sent a wave of apprehension through markets on Friday. Worried that another winter of mobility restrictions could once again dramatically slow global economic activity, investors chose to dump stocks and seek the protection of safe haven assets, despite knowing little about the new so-called Omicron variant. The MSCI All-Country World index plunged 2.2 percent on the day. Stocks in the U.S. fell by a similar amount, and the VIX index spiked higher from 18.6 to 28.6. European markets, already dealing with an infection surge from the Delta variant, got hammered, as the EuroStoxx 50 index fell 4.7 percent. Brent crude oil plunged $9.50, or 12 percent, a barrel. The yield on the ten-year Treasury note fell 16 basis points to 1.47 percent, and the two-year note yield fell from 0.60 to 0.48 percent.

A number of countries responded by imposing travel restrictions on certain nations in the south of Africa where the variant was first identified. Nevertheless, infections were also identified in several European countries, as well as Canada and Australia. Although unconfirmed, the variant has also likely found its way to the U.S. The new variant is believed to be more transmittable than the Delta variant, but those infected are described as experiencing relatively mild symptoms. It is estimated that it will be several weeks before it is known whether the existing suite of vaccines provides protection against the new variant, but South African healthcare officials have indicated that most hospitalizations from the new strain were among patients who were unvaccinated.

Markets Regain Some Momentum as Uncertainty Looms

The sell first, ask questions later investor mentality is showing signs of partially receding, however, as trading gets underway on Monday. European stocks have recovered 1.2 percent in midday trading, and U.S. futures are also indicating a modest rebound. The ten-year yield has climbed back to 1.53 percent, the two-year is back up to 0.55, and Brent crude is higher by $3.18 a barrel.

How significant the economic impact of the new variant will be remains to be seen. Until there is greater clarity from the healthcare community, capital markets will be under a cloud of uncertainty. Guessing the outcome could be costly if the new variant proves to be more challenging than hoped. And until there is more clarity, the usual markers of economic conditions will be less useful than normal, as they reflect conditions as we know them, not as they may turn out to be. This same conundrum presents a challenge for policy makers who are well aware of the limited appetite for new mobility restrictions, and central bankers who are dealing with inflationary pressures that may be directly impacted. For example, the Federal Reserve meets next on December 14-15 amid talk of accelerating the pace of its bond tapering schedule against a backdrop of higher-than-expected consumer inflation and doubts about how persistent it will be. But, unless the healthcare community has answers about the Omicron variant in the next two weeks, on what basis can the Fed decide?

Investors Attempt to Gauge the Economic Impact of Both New and Old Variants

In the meantime, we can monitor the spread of the virus, both new and old variants, and attempt to gauge the ongoing economic impact. But for investors, who value certainty above almost everything else, the days and weeks immediately ahead may be particularly unnerving.

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A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years.

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The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. VIX values greater than 30 are generally linked to a large volatility resulting from increased uncertainty, risk and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.

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