Kolanovic Asks: What If Omicron Ends Up Being Bullish?

JPMorgan’s Marko Kolanovic has a few questions about the Omicron variant and associated turmoil across assets, especially those tethered to global growth and the cycle more generally.

In a note out Wednesday afternoon, Kolanovic echoed a piece from December of 2018, when he suggested that month’s egregious selloff was exacerbated materially by negative news coverage, some of which landed in a vacuum.

“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,” he wrote, adding that “a second blow to markets was delivered shortly after, also in the middle of night in the US.”

The latter is a reference to comments from Moderna CEO Stephane Bancel, whose remarks to FT blindsided markets Tuesday, setting the tone for what ended up being a rather harrowing session defined by hawkish rhetoric from Jerome Powell. When the dust finally settled, curves had flattened fairly dramatically (figure below) suggesting a policy error, a growth scare or a combination of the two (they often go hand in hand, especially as manifested in rates).

The point is simply that knee-jerk reactions are notoriously unreliable. When bad news hits at inopportune times (i.e., when liquidity is sparse) it can create exaggerated price action which, thanks to modern markets, then tips dominoes as spot equities (for example) careen through key levels associated with dealer hedging flows and CTA de-leveraging. Because volatility is inversely correlated to market depth, the situation feeds on itself.

Kolanovic went on to say Wednesday that the bank’s clients are generally more concerned about lockdowns than they are about the variant itself. He also suggested some of the more foreboding claims about Omicron’s infectiousness versus the Delta variant might be overstated.

Then, he posed a series of questions about the read-through of a potentially less deadly variant for the global economy, markets and the pandemic more generally.

“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,” Kolanovic wrote, before asking,

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?

Needless to say, everyone has their own opinion on the situation. We won’t know much definitively for at least another week.

Ultimately, Kolanovic suggested that the Omicron selloff in cyclicals, commodities and reopening themes is a buying opportunity.

He also said it’s an opportunity to position for higher yields and a curve steepener.

On Wednesday, the CDC confirmed the US’s first case of the Omicron variant in California. Governor Gavin Newsom said the patient wasn’t hospitalized and “is doing well.”


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