How much alarm?
There have been a number of variants and false alarms about mutations since the start of the pandemic but this is the first one to truly capture the market's attention.
It comes after a long period of the market largely ignoring the pandemic and looking forward to the post-vaccine world.
So the question becomes: Is the B.1.1.7 variant a gamechanger?
Public health officials are certainly concerned. The UK border closures highlight the high degree of worry regarding this strain.
Reuters has a closer look at the strain today and they cite scientists saying it's 40-70% more transmissible. The UK government said it could increase the reproduction rate of the virus by 0.4 pp.
"The new B.1.1.7 ... still appears to have all the human lethality that the original had, but with an increased ability to transmit," said Martin Hibberd, professor of emerging infectious disease at the London School of Hygiene & Tropical Medicine in the Reuters report.
A Telegraph report said the new variant could mean the UK remains on lockdown until Easter. That would cripple the economy and lead to a deeply negative Q1 GDP print.
Given that the variant has already undoubtedly spread to many other countries and it may not have originated in the UK. That could mean it contributes to overwhelming hospitals and makes the virus curbs in most of the world ineffective.
The good news is that nearly all officials believe the vaccines will still be effective, so the timelines of a return to normal are largely unchanged.
The question for markets participants are:
1) How confident are we in the 40-70% number?
These are early days. It could just be an outbreak in the UK or some other coincidence. Watch for spikes in cases very closely because if transmissible spikes everywhere, it's a problem.
2) How much more money will be needed?
The base case in the market is that governments are absorbing the bulk of covid losses, leaving companies and individual balance sheets in decent shape. But have we exhausted the fiscal response in many countries? The US is probably tapped out, pending the Georgia election result. Certainly the willingness to spend is less but I'd argue that it's not gone and that should be good for gold.
3) Can the market continue to look beyond it?
I think that reflex isn't going to go away. That said, markets have run a long ways and no one wants to spend the next four months in lockdown. Still, we've learned to live and work with the virus. Aside from retail and food services, the long-term prognosis is still good.
For the moment, it's going to be all about sentiment and that's tough to predict. I'll be keeping a close eye on the bond market and oil as risk proxies.
