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Finanshus: Omicron kan betyde Risk Off og blive slutningen på virus-pandemien

Morten W. Langer

torsdag 02. december 2021 kl. 9:19

Uddrag fra JP Morgan/ Zerohedge

……. fast forward to today when none other than JPMorgan’s head quant Marko Kolanovic – whose long running growth-to-value thesis just suffered a spectacular meltdown in recent days, also paraphrased what we said, and in a note whose title is oddly familiar, namely “What if “Nu” variant Omicron ends up positive for risk?“…

… reaches the same conclusion as us for the same two reasons: Omicron is i) more transmissable and ii) less severe, which means it will eventually crowd out the Delta and other dangerous variants, and could in fact “accelerate the end of the pandemic.”

Before we get to the punchline, a quick detour into how Kolanovic explains the violent stock rout observed in the past 4 days, which he attributes to two main sources of confusion: government responses and tranmissibility assessments, to wit:

What was the timeline and how did the market react on the Omicron variant? Despite Omicron being around for several weeks, a media blitz happened on Thanksgiving evening, one of the lowest points of market liquidity for the whole year, prompting a crash in various  assets sensitive to global growth and recovery such as Oil. A second blow to markets was delivered shortly after, also in the middle of night in the U.S. (Monday midnight), with the Moderna story (here) that was later largely invalidated by reports from Pfizer, Oxford, the WHO, and the Israeli Health Ministry (hereherehere). Many clients have told us they are not worried about Omicron itself, but the reaction of governments. For example, currently flights are restricted from several African countries that don’t have Omicron, while on the other hand, flights are not restricted from European countries that have cases, and similar apparent inconsistencies.

Another source of confusion comes from assessments of Omicron’s transmissibility. Broadly circulated claims that the new variant is 500 times more infectious than Delta (here) seem implausible. For instance, assume that R0 for Delta is 4, so Omicron would have an R0 of 2,000, meaning one infected person should result in 2,000 new infections? This is highly unlikely when on average an individual has 16 daily contacts (here), and, by that math, the whole world would have been already infected in less than a week (i.e., 3 cycles would result in 20003 = 8Bn infections). This figure came from extrapolating transmissibility from relative spread of Delta and Omicron, but not accounting for the fact that Delta is being spread in significant part via breakthrough infections in a significantly immune population (e.g., via vaccines or recovery). In simple terms, when older variants are spreading via breakthrough infections, new variants will always appear to be significantly more transmissible than older ones. This was explained in work by Gabriela Gomes (e.g., see here).

Which brings us to Kolanovic’s punchline which, for what it’s worth, is identical to ours:

While it is likely that Omicron is more transmissible, early reports suggest it may also be less deadly – which would fit into the pattern of virus evolution observed historically. Should these trends be confirmed in the coming weeks, could the Omicron variant ultimately prove to be a positive for risk markets, in the sense that it could accelerate the end of the pandemic?

If a less severe and more transmissible virus quickly crowds out more severe variants, could the Omicron variant be a catalyst to transform a deadly pandemic into something more similar to seasonal flu? That development would fit with historical patterns (duration and number of waves) of previous respiratory virus pandemics, especially given the broad availability of vaccines and new therapeutics that are expected to work on all known variants (Pfizer, Merck).

Of course, it goes without saying that Kolanovic’s perpetual optimism is dictated by a simple overarching philosophy: he needs to always find a bullish spin in every situation, especially when JPM clients are surely calling him every hour and asking why the growth-to-value rotation he has been pitching so aggressively for the past year just imploded. The Croat admits as much:

If the market were to anticipate that [positive Omicron] scenario – Omicron could be a catalyst for steepening (not flattening) the yield curve, rotation from growth to value, selloff in COVID and lockdown beneficiaries and rally in reopening themes. Also, if that scenario were to happen, instead of skipping two letters and naming it Omicron, the WHO could have skipped all the way to Omega. As such, we view the recent selloff in these segments as an opportunity to buy the dip in cyclicals, commodities and reopening themes, and to position for higher bond yields and steepening.

The bolded sentence doesn’t surprise us: unlike the Marko Koalnovic of old who skeptically, rationally and diligently analyzed every possible outcome with a focus on the downside, ever since his promotions the head JPM quant has just one function – to spin every possible scenario into a positive one (which with the help of the Fed’s $8+ trillion balance sheet wasn’t all that difficult). As such, his attempts to spin Omicron as a positive event is hardly a shock. That said, for the very same reasons which we discussed first days ago, this is one time when Marko may actually be right and the next few days will reveal if that’s the case.

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