My base case assumption is that omicron will tear through China like it currently is in the rest of the world.
How that unfolds will determine what happens in markets in the next few months. In the worst-case scenario, China has some measure of success holding it back but non-stop outbreaks result in off-and-on lockdowns throughout the country, snarling the strained global supply chain towards a breaking point.
The best case scenario is that China contains it. Given the transmissibility, I highly doubt it but I would have said the same thing about delta.
A more realistic and less negative scenario is that omicron quickly overwhelms China and they quickly abandon the covid-zero policy. I doubt that can happen before the Olympics from Feb 4-20 but we will just have to wait and see.
Locally, it's was first detected in Guangzhou on Tuesday and another cases related to it was found yesterday so this could unfold in rapid fashion. There's an outbreak in the manufacturing city of Dongguan with six new cases yesterday. There's a mass testing drive ongoing in the city of 10.5 million. Indications are that this is the delta strain but it's only a matter of time before omicron cases arrive. In Hong Kong, two omicron cases were detected in arriving flight crews. That was one of 10 new cases Thursday.
Don't forget that lunar new year is coming at the worst possible time with the holiday running from Jan 31 to Feb 6. That will mean extensive travel and make contract tracing extremely difficult.
How will markets react?
I think markets are sleeping on this risk.
There's a knee-jerk reaction right now to buy dips because most of the world has learned how to keep the economy going even with covid raging. Lockdowns are targeted know and businesses know how to adapt. Moreover, as hard as omicron is hitting, we know it will be gone in a few months.
That's simply not the case with China and the range of possibilities of how it could play out there are endless. Eventually that will be a dip to buy as well but right now it's so hard to estimate how China will react when they inevitably begin to lose the battle against omicron.
