In late November the WHO warned the world about a possible third wave of the COVID pandemic in early 2021. This warning sounded far-fetched, as the second wave was still ongoing, and the peak had not been reached yet. However, a new, more contagious strain of COVID appeared in the United Kingdom in December, which can greatly increase the infection rate and essentially start a third wave over the second, earlier than previously predicted by the WHO. What can the third wave be like, and how will it influence the markets?
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What Is The Third Wave And When Can It Start?
Epidemics typically occur in waves, when the number of new cases grows exponentially at first, then reaches a peak or a plateau, then decreases, then starts increasing again. The Spanish flu is the archetypal example, which had three main waves with peaks in July and November 1918 and February 1919.
The waves can happen due to many factors that influence infection rates: the percentage of people that recently had the disease (if it is large enough, the spread of the infection slows down), the current season (the probability of infection decreases in the summer for many diseases), and the stringency of the quarantine measures.
For the COVID-19 pandemic, the first wave happened in the spring of 2020 in most countries. In many countries (such as the EU members) the epidemic died down in the summer due to quarantines and warmer weather, but regained strength in the fall. In some countries the classic wave pattern did not play out, while other countries (such as Israel) are already talking about a third wave. If we take the world as a whole, the second wave, according to the WHO's statement in October, is closer to being a second peak rather than a second wave in the usual meaning of the term. In this article, for the sake of clarity, we shall call the stage of the pandemic that started in October the “second wave”.
The WHO predicts that the third wave will take place during the first half of 2021, but the new highly contagious strain of the virus that has appeared in the UK can lead to an earlier start of the third wave. The key question that can define the new strain's role in the pandemic is whether it can infect people who have already acquired an immunity to COVID, either from recovering from the disease or getting vaccinated. If the new strain can infect them, it can be seen as the start of the third wave with the loss of the immunity that was acquired during the second wave.
The role of the collective immunity and vaccination at the end of the first and second waves
It is unlikely that the immunity acquired by the population played a significant role at the end of the first wave of COVID. The highest percentage of recoveries was found in smaller Italian towns (up to 60%) and some districts of New York City (up to 40%). In most other places the percentage of people with the immunity rarely exceeded 25%. Vaccines did not exist yet. The main restraining factors against the pandemic were quarantines and warm weather.
The second wave began in the fall in near-perfect conditions: the weather grew colder, the people who had the disease in the spring had mostly lost their immunity, and the people grew tired of being afraid and were strongly opposed to new quarantines. Whether it was due to natural selection among the strains or people acting more cautiously (such as wearing masks more often, decreasing the dose of the virus being received), the percentage of severe cases decreased, and the spring's panic was followed by indifference.
As a result, the second wave turned out to be much stronger than the first one, as it affected a large chunk of the population, even if they only were asymptomatic carriers. In December, Moscow's mayor Sergey Sobyanin said that it was possible that 50% of Moscow's citizens had already had the disease. According to some estimates, the number of people who contracted COVID is over 60% in some regions of Russia. The official number of cases is less by an order of magnitude, but today people don't even regard it as deliberate misinformation, as medicine in Russia, just like in other countries, is under too much stress to test everyone in time. Often, the patients are only tested when they have already recovered and are likely no longer contagious.
Although many countries imposed new lockdowns in November and December, these lockdowns may not be the only reason why they are currently at a plateau. A significant number of people having acquired immunity may be another factor. In addition, a number of countries (such as Russia, the US, and the UK) have already begun vaccination, and others (such as the EU countries) are planning to start vaccination before the end of 2020. These vaccinations decrease the number of people susceptible to the disease even more every day. In the US, over a million people have already been vaccinated, and around 20 million are expected to be vaccinated by the end of December. According to JP Morgan Chase, by April 50% of the population will be vaccinated, which should stem the epidemic when a large percentage of the people have had the disease (the immunity to COVID lasts for 8 months after recovery).
For countries with a high percentage of people who had the disease, vaccinating even 20% of the population around February has a good chance of stopping the second wave and drastically decreasing the number of new cases. The main point of the new lockdowns is not so much in stopping the spread of the virus directly as reducing the percentage of the population that could catch the disease before being vaccinated. All of this, however, assumes that the spread of the new British strain can be slowed by the immunity that is already present in the population and by the current vaccines. Let us therefore examine two scenarios where the new strain is either able or unable to bypass the current immunity.
Optimistic Scenario: The Third Wave Starts In The Spring, As Predicted
If the new COVID strain is unable to infect people who have been vaccinated or have already had the disease, and does not exacerbate the symptoms (which is currently believed to be the most likely scenario), then the new strain's main effect on the pandemic will be delaying the plateau and increasing the number of people who would catch the disease before being vaccinated. In the UK the number of new cases rose by 40% during this week, although this may also be due to the weather or the approaching weekend. It is likely that the new strain has already appeared in many other countries, and in some regions in Russia the Rt coefficient (the number of people that an already infected person infects) rose above 1 after a short-lived drop.
However, the vaccination rate is nearly unaffected by the disease's infection rate, and is currently only limited by the pharmaceutical companies' production capabilities. Pfizer and Moderna planned to produce several tens of millions of vaccines, and over 2 billion in 2021. It is likely that in the first months of 2021 the number of vaccines will be in the hundreds of millions. Vaccines from Pfizer-BioNTech and Moderna are mostly being distributed in the US and the EU at the moment, but they are not the only vaccines available in the world. Russia uses the Sputnik V vaccine, and it is also planning to start the production of another vaccine soon, called EpiVacCorona. The delivery of Sputnik V to Argentina has already started, and negotiations with other countries are also underway. The development of the AZD1222 vaccine by the Oxford University and AstraZeneca is behind schedule, but the vaccine is likely to be improved soon.
This means that by the end of January the number of people with immunity to COVID is already going to be high enough for Rt to drop significantly below 1, and the number of new cases will decline greatly. Paradoxically, the high contagiousness of this strain may actually accelerate this decline, since a higher percentage of people will get the disease in a shorter time. In February and in the spring, two competing factors will be at work: on the one hand, a higher percentage of people will get vaccinated, and on the other hand, the people who had the disease in the fall will gradually lose their immunity. Theoretically, this can cause a third wave of COVID. However, this wave is expected to be weaker, both in terms of infection rate and in terms of economic consequences.
The most important factor that will make the third wave milder is vaccination, which will cover a significant percentage of the population by that time. By April, half of the population may already be vaccinated – not just in the US, but in other developed countries as well. If COVID's Rt is estimated at 2.5-3 when completely unchecked, then, when half of the population is vaccinated, it is unlikely to get higher than 1.5. This would make even the most basic quarantine measures (such as masks) sufficient for keeping Rt below 1. Citizens who fear the most for their health or are especially at risk can get vaccinated more quickly. In case of new lockdowns, people who are known to be vaccinated or otherwise immune can go on with their lives as usual, which would further mitigate the economic damage.
Pessimistic Scenario: The New Strain Starts The Third Wave
If the new strain from the UK turns out to be contagious for people who have already been vaccinated or have recovered from the disease, it would mean that the third wave would start and render previously acquired immunity irrelevant. Most experts believe that the previously acquired immunity should provide at least partial protection from the new strain. Despite that, improvements to the current vaccines may be needed.
Improving vaccines for new strains is fairly routine work. The vaccine against seasonal flu needs to be modified once every few years. This is a much quicker process than developing a new vaccine from scratch. However, in the current situation even a one-month delay and the need to vaccinate tens or hundreds of millions of people may mean serious trouble for the world. The third wave will effectively begin in January. In the countries without lockdowns, the third wave will spread even more quickly than the second one, and for the countries that do impose lockdowns this would mean even tighter restrictions than in the spring. There is a real risk that the main defense against the virus in most of the world's leading countries will be an actual collective immunity of the 60-80% of the population that will get the disease once more, rather than vaccines. The number of deaths will increase greatly, and the vaccines will primarily serve as protection against future waves.
The Markets: How They May React And What They Are Saying Now
When we talk about markets, we must understand that the investors are tracking the situation with the new strain carefully. They watch the news and sometimes even directly consult the experts. The correction on the stock, oil, and cryptocurrency markets that took place after the news of the new strain turned out to be small. The most likely explanation for this is that financiers do not see the new strain as a serious problem. The opinion of the investor community in this situation can be trusted even more than the opinions of the experts in the media, as investors risk losing their money if they make a mistake.
Every day more people are getting infected with the new strain, and if there are no new signs of danger based on these new cases, there are unlikely to be more in the future. Current data show that the new strain may increase the chance of people who have long since recovered from COVID getting the disease again, but the vaccines will still counter it.
New market crashes like those in March are unlikely. That crash was caused by the high level of uncertainty: whether the virus could be stopped, how strict the quarantines would be, and what kind of stimulating and restraining measures the governments were willing to take. It is uncertainty that frightens the investors the most, but there is not as much reason for uncertainty today. Even if the pessimistic scenario plays out, the world has already had a lot of experience with quarantine measures, and can assess their effectiveness. The vaccines will only need to be improved, rather than recreated from scratch. The situation will be difficult, with an even greater increase of the world's money supply, the devaluation of the leading currencies, a decrease in oil prices and perhaps indices, but not all assets' prices dropping by several dozen percent.
By Victor Argonov, senior analyst at EXANTE
