Stocks fell this morning as investors continued to weigh Covid fears. With cases rising around the world, it’s clear that not only is Covid making a comeback, but that the new Omicron variant could throw a sizable “wrench” in the US’s post-pandemic recovery.
Despite producing milder symptoms, the Omicron variant is more infectious according to doctors who first discovered the new strain. This is likely a positive turn of events should Omicron replace Delta in the coming weeks as the dominant variant, as it would theoretically result in fewer hospitalizations.
To WHO director-general Tedros Adhanom Ghebreyesus, though, there’s nothing about Omicron that’s worth celebrating.
“Certain features of omicron, including its global spread and large number of mutations, suggest it could have a major impact on the course of the pandemic,” Tedros said.
But perhaps the most disheartening Omicron-related soundbite came from Pfizer CEO Albert Bourla, who said this morning that people may potentially need a fourth shot sooner than expected to fight Omicron.
“When we see real-world data, will determine if the omicron is well covered by the third dose and for how long,” Bourla observed.
“And the second point, I think we will need a fourth dose.”
Remember when you only needed one dose of the Pfizer vaccine to be considered vaccinated? Those days are long gone. And don’t forget that each additional dose is simply the same stuff being injected multiple times, intended for the original Covid that came out of Wuhan. We’ve already run through both the Alpha and Delta strains with no variant-targeted changes to the vaccine.
Next up is Omicron, and Pfizer thinks that people will need a fourth dose of the unaltered vaccine to beat it back.
Unsurprisingly, this news stole the mainstream financial headlines this morning as investors groaned at the idea of yet another booster. But in China, the birthplace of Covid, something far more sinister happened that flew completely under the radar:
Evergrande, China’s largest real estate developer, finally defaulted after months of grasping at solvency. We observed back when the Evergrande problems first started that a default seemed inevitable. It wasn’t a question of if Evergrande would go “belly up,” but when.
When arrived earlier today (at least partially) after ratings agency Fitch reported the company defaulted on offshore bonds. Now, Evergrande has been given “restricted default” status alongside Kaisa Group, another major Chinese property developer that also missed offshore payments.
It’s important to note that Evergrande has not declared bankruptcy yet. The company is still in operation. But that could change quickly as certain holders of US dollar-denominated notes (those who control at least 25% in aggregate) can now demand immediate payment on those debts. This is what happens after a company triggers an “event of default,” which according to Fitch, occurred when Evergrande missed coupon payments on two bonds at the end of a 30-day grace period on Monday.
Fitch reached out to Evergrande to see if the payments were made. Evergrande didn’t respond, so Fitch assumed that the payments were missed. S&P, another major ratings agency, has yet to declare “selective default” (their version of restricted default), but the agency sees it as an inevitability following Fitch’s report.
For now, the damage has been limited to foreign bondholders, which means Chinese investors haven’t had to take a haircut. At least, not yet.
That’s probably coming, though, as bondholders attempt to claw some funds back. The short-term concern is identifying who the major offshore bondholders are and seeing what kind of damage could result from future defaults. Pensions may be at risk alongside cryptocurrencies, the latter of which is in danger because of Tether’s sizable Evergrande commercial paper holdings, denoted in US dollars.
Longer-term, the Chinese real estate market could potentially crash after Evergrande and Kaisa are chopped up and restructured, either through existing enterprises or a more nationalized, state-owned structure. If Chinese real estate goes down, the Chinese economy would likely follow, whacking the West as well.
So, while today’s Covid headlines were certainly disappointing for bulls, Evergrande’s default really should have received the majority of this morning’s coverage. It’s something that threatens to unravel the entire Chinese bond market, and eventually, virtually every other market as well.