A couple of weeks ago, Morgan Stanley became the latest analyst to join the Wall Street bear club, predicting that the U.S.stock market bull run would not continue much longer past Thanksgiving. Although MS’ key reason for the bearishness was a payback in demand in 2022 after record fiscal stimulus, the analyst was spot on regarding the timing of the selloff.

The U.S. stock market has gone into reverse gear as a cross-section of health experts continue to express serious concerns about the newly discovered Omicron variant of Covid-19.

On Monday, the World Health Organization (WHO) declared the Omicron coronavirus variant carried a very high risk of infection surges, with border closures by more countries now casting a shadow over an economic recovery from the two-year pandemic.

But the markets appear to be more shaken by comments by Moderna chief executive Stéphane Bancel who has warned that existing vaccines will be much less effective at tackling Omicron than earlier strains of coronavirus, adding that it would take months before pharmaceutical companies could manufacture Omicron-specific vaccines at scale. 

“There is no world, I think, where [the effectiveness] is the same level . . . we had with [the] Delta [variant]. I think it’s going to be a material drop. I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to . . . are like, ‘This is not going to be good’,”  Bancel has told the Financial Times.

Bancel says scientists are particualry worried because 32 of the 50 mutations in the Omicron variant are on the spike protein, which current vaccines focus on to boost the human body’s immune system to combat Covid. Most experts did not expect such a highly mutated variant to emerge in less than a year or two.

The S&P 500 fell 1.8% on Tuesday’s session, with the high-flying energy and retail sectors emerging as the biggest losers after dropping 2.6% and 3.3%, respectively.

The gloom has spread to international markets: the UK’s FTSE 100 index, Germany’s DAX lost France’s CAC and Spain’s IBEX have all been sliding 1-2% over the past three trading sessions with Hong Kong’s Hang Seng index falling 2.3%.

Less Effective

Bancel’s comments have come at a time when various public health experts and politicians have been trying to strike a more upbeat tone about existing vaccines’ capacity to protect against Omicron.

On Monday, Scott Gottlieb, a director of Pfizer and a former  US Food and Drug Administration (FDA), told CNBC: “There’s a reasonable degree of confidence in vaccine circles that [with] at least three doses . . . the patient is going to have fairly good protection against this variant.” 

U.S. President Joe Biden has also sounded a more optimistic outlook,saying he believes that the vaccines will continue to provide a degree of protection against severe disease. 

The contrasting outlooks by the Moderna and Pfizer executives are interesting because the two companies  have become the leading vaccine suppliers for most of the developed world. Yet, experiences with the Delta variant suggest that Bancel’s concerns are merited.

A Stanford University study of a Delta outbreak at a California prison found that Moderna’s mRNA-1273 jab was just 56.6% effective against infection, substantially lower than the 94.1% efficacy demonstrated in large-scale clinical trials against the original strain. Thankfully, the vaccine was still able to offer a high degree of protection against symptomatic infection (84.2%) in the prison study, and was also shown to reduce the risk of subsequent infection in men who previously had COVID-19 by 80.5%.

Taper Dilemma

Up until recently, the Federal Reserve looked ready to speed up its tapering of asset purchases after encouraging economic data. A week ago, Bloomberg reported that unemployment claims fell to 199,000, levels last seen in 1969. While the U.S. economy is still short around 4 million jobs compared to pre-pandemic levels, the unemployment rate has been steadily falling with the latest clip clocking in at 4.6% down from 4.8% with 531,000 jobs added last month.

But now the Fed  faces a serious quandary thanks to so much uncertainty surrounding the Omicron variant. Treasury yields have been tumbling, with the 10-year yield falling from 1.68% a week ago to 1.44%.

Before Thanksgiving, the market had been pricing in nearly three quarter-point rate hikes for 2022 starting in June after the taper ended, while Goldman Sachs was looking for the Fed to double the speed of tapering starting in January.

But those expectations have now been tempered, with traders now pricing in a 68% chance of higher rates in June 2022, with a rise not really fully priced in until December.

"Fed speakers this week might have to balance the emergence of the new variant with the obvious point that without it the Fed is a fair bit behind the curve,’’ Deutsche Bank's Jim Reid has said.

Traders will be eagerly waiting to hear Fed chief Jay Powell’s testimony before the Senate Banking Committee on Tuesday and House Committee on Financial Services on Wednesday to try and predict the market’s next trajectory.