Developed Markets July 12, 2021 / 12:55 pm UTC

Markets and Delta, Delta Plus and Lambda

By Mike Gallagher

Bottom line: Financial markets will focus on further economic disruption from the Delta COVID wave, though the impact will lessen as vaccinations weaken the relationship between confirmed cases and deaths. Any adverse impact on sentiment will likely be temporary and localized. A vaccine-evading COVID mutation is possible, but the odds are only modest rather than high.

Figure 1: Biweekly Confirmed Deaths per million 

Source: Our World in Data 

While vaccinations are allowing official social distancing relaxation in most DM economies, different vaccination paths elsewhere means that COVID remains a threat in many countries for health systems and the pace of economic recovery. Scientists are warning that the Delta variant is becoming dominant in many countries after already becoming widespread in India and the UK. Though data in the UK so far shows that vaccines reduce hospitalizations by 92-96% for fully vaccinated people, the UK has over 50% of the population double-vaccinated and this should surge to 70% by late summer. Russia has had a Delta wave, which has led to a surge in case and deaths (Figure 1) given the much lower percentage of fully vaccinated people. Scientists are estimating that 85% of the population would need to be vaccinated or have had COVID to achieve herd immunity with the Delta variant. Some 60-70% of the total population could provide some form of herd immunity and reduce the links between cases and deaths, but could still mean COVID waves this winter that cause some voluntary social distancing. Our economic views incorporate that the differential rollout of vaccines will mean that recoveries are unsynchronized and that domestic conditions need to be followed closely. 

For economists, further COVID waves do not derail rebounds but rather delay recoveries. For the EZ/UK, the current Delta wave can temporarily increase social distancing and see a partial reversal of some social distancing (e.g. Netherlands). We remain concerned that vaccine hesitancy in Russia and Japan could mean that vaccinating 60-70% of the total population is very difficult to achieve. We are also concerned that Asian countries including India are vulnerable to a Delta wave in the next few months or a winter wave, though high vaccination rates in China suggest it is now better protected and lower risk. 

What about Delta plus and Lambda? Scientists argue that Delta plus is very similar to Delta. This still makes it a problem, but it is not a breakout mutation like Alpha and Delta, which have spread worldwide and caused new waves in 2021. Meanwhile, the Lambda variant was first seen in Peru in December 2020, but appears to have peaked into the spring (Figure 1). More importantly, as with Beta and Gamma it is not spreading across as many countries as Alpha and Delta and also is not yet a variant of concern. For now, the next six months are mainly focused on a vaccination race against Delta for major EM countries. Any adverse impact on financial market sentiment will likely be temporary and localized.

Could a variant bypass vaccines and cause a new global wave and renewed lockdowns? This is possible and we attach a 20% probability to such a scenario, within our overall adverse scenario. However, scientists argue that COVID is a conservative virus in terms of mutations and the odds remain that vaccines can guard against mutations, though this will likely require boosters to increase effectiveness. 

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Analyst Certification
I, Mike Gallagher, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.