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Wall Street pencils in virus variants as latest economic risk

Wall Street is pinning its bets of an economic rebound this year on mass vaccinations and a virus brought under control, but new coronavirus strains threaten that sunny outlook, a number of firms are warning.

Why it matters: None downgraded growth forecasts because of the variants, but they’re acknowledging there’s a new asterisk to the anticipated economic recovery.

Driving the news: British Prime Minister Boris Johnson said Friday the country’s more contagious variant is also more deadly — research that the U.K. scientists say is still uncertain and the Center for Disease Control and Prevention plans to review, as CNN reports.

  • Anthony Fauci said last week vaccines appeared to be effective against the mutated coronavirus. But he also warned of non-peer-reviewed studies that raised the possibility that the vaccines may be less potent against the variants — including one first found in South Africa.

What they’re saying: Goldman Sachs economists said over the weekend the “evolution of a vaccine-resistant virus strain” could push off the explosion in consumer spending expected to fuel the economic recovery.

Echoing that sentiment...

  • Barclays: “[N]ew virus variants seem more contagious and potentially also more resilient to existing vaccines ... making for a delayed and less linear path towards a ‘restriction-free’ economy,” per a note out on Friday.
  • MUFG: Coronavirus variants are “obviously ... headwinds for economic activity,” rates strategist John Herrmann wrote on Friday, though he noted the recovery still has “strong tailwinds.”
  • Colin Teichholtz, head of markets at Element Capital Management, one of the world's biggest macro hedge funds, tells the Financial Times ...“What you are seeing in the UK today you will see over much of continental Europe, and I don’t think markets [and] ... policymakers are really grasping that,” referring to the variant’s spread.

Yes, but: If there’s a backslide, the Fed has signaled it would step in — vowing to support financial markets and the economy until the recovery is on solid footing.

  • Plus, Wall Street shops have pushed up economic growth estimates for this year, citing the expected flood of fiscal stimulus.

What’s next: The Fed caps off its two-day policy meeting with a press conference on Wednesday.

  • No policy changes are anticipated, though Fed chair Jerome Powell is expected to reassure investors that the Fed won’t back off its bond-buying program anytime soon — and when it does, there will be plenty of notice.

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