One Trader's First Thoughts On The Nu Variant

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by Tyler Durden
Friday, Nov 26, 2021 - 12:31 PM

By Peter Chatwell, head of multi-asset strategy at Mizuho International

Seems likely at this point that this new variant will have spread much more than has already been identified, due to lack of sequencing in many countries.

The main concern is that Nu may, due to the large number of mutations, have materially lower vaccine efficacy.

MRNA vaccine producers have previously said that they can adapt their vaccines within 6 weeks. The main issue would be getting these distributed and circulated amongst the population in DM. Much more of a problem for EM. I doubt this would mean that DM economies are able to roll new vaccines out amongst sufficient numbers of the population to build immunity before March.

First thoughts of macro impact, assuming Nu is as potent as it looks:

  • The European lockdowns on their own would have meant soft Q4 GDP growth, but Q1 rebound. US, UK, Asia all looked unaffected by Europe’s problem. If Nu does deliver its potential (usurping Delta, and reducing vaccine efficacy) we need to think about a globally soft/flat Q4 and Q1 GDP growth. Vaccine efficiacy will determine the severity of lockdowns, and therefore whether this becomes another recession.

  • This will negate the need for monetary tightening that most DM central banks were leaning towards. Expect hikes to be pushed out by about 6 months.

  • However, more supply disruption for the global economy (if Nu has spread to exporting nations) will mean we can have another, smaller, burst of inflation next year as economies reopen.

  • This will mean that CBs will generally not have any room for moving towards monetary easing, but merely attempting to keep the financial markets in shape.

  • Think that this will give the ECB reason to consider extending PEPP beyond march, simply because they link PEPP to the life of the pandemic, and Nu may be having an impact beyond March.

  • Fed, BoE, more independent CBs who were already tightening have no room to move to easing, due to inflation.

  • Covid-impacted sectors need to prepare for Dec-March revenues to be missing.

  • Govts will use fiscal support mechanisms for unemployment and business support.