The announcement of real progress in the development of a vaccine is unequivocally good news but is it really quite as good as the reactions of financial markets might suggest?
The trials of the vaccine developed by Pfizer and Germany’s BioNTech have, in late stage trials, produced results far better than might have been expected, with an efficacy rate of over 90 per cent.
It’s undoubtedly a positive development, however, it’s early days when it comes to confirming the vaccine’s effectiveness and the absence of serious side effects. And even if the results of the relatively small trial are confirmed, it will be well into next year before a mass roll out of the vaccine can begin.
Even with emergency authorisation by the US Food and Drug Administration and its peers elsewhere, it will be close to Christmas before the first vaccinations of emergency workers and the most vulnerable can start in the US and other jurisdictions.
The vaccine requires two shots and has to remain chilled while transported and stored, complicating and slowing the eventual global distribution required to see off the pandemic.
Pfizer says it hopes to manufacture 50 million doses by year-end and one billion in 2021, which provides some insight into the scale of the challenge of vaccinating the majority of the near eight billion people on the planet.
There are, of course, other potential vaccines under development that would quicken distribution but it is obvious that the best case is for the vaccines to have a material impact in the latter half of next year. In the meantime, new waves of infections are surging in the US and Europe.
The timelines for a successful development and roll out of a vaccine put the markets’ ecstatic response to the news into perspective. Not for the first time they have got well ahead of themselves.
Having decided that the outcome of the US election was a positive, despite it being something other than what they had priced in previously, investors went all-in in their response to the promising news on the vaccine.
Sharemarkets around the world spiked – the US market was up 1.2 per cent on the day after its big run last week, European markets soared more than six per cent and the FTSE 100 was up 4.7 per cent.
US ten-year bond yields spiked 13 basis points to 0.95 per cent. Last week they had fallen as low as 0.76 per cent. The move on Monday would be consistent with an expectation of a strong pick-up in economic growth.
The gold price tumbled 4.6 per cent, oil prices rose 2.63 per cent and technology stocks fell 1.53 per cent in a sign that investors believe that those stocks that benefited most from the pandemic’s impact on work and leisure will see their results deflate as a more normal environment returns and that there will be a bounce-back in those stocks it punished.
Zoom’s stock, for instance, was down 15 per cent and Amazon was down five per cent. Conversely, shares in sectors ravaged by the virus, most notably airlines and travel, soared. The Carnival cruise group’s share price shot up 38 per cent and all the major US airlines saw their share prices surge more than 20 per cent.
Even assuming all goes well – perfectly, actually – the markets, while always forward-looking, are probably looking too far ahead by pricing an end to the pandemic into current share prices.
Between now and then both US and Europe face massive social and economic challenges just as they were starting to recover from the earlier phases of the pandemic. The economic wounds, already deep, will get deeper and some scars will remain indefinitely even after the virus is brought under control.
Vaccine no antidote to uncertainty
In the US, the election of Joe Biden is expected to result in a significant new COVID relief package, albeit one shrunken from the Democrats’ original multi-trillion dollar plan if, as appears likely, the Republicans retain their majority in the Senate.
The development of a vaccine will embolden the Republicans to go low on the amount of fiscal stimulus they are prepared to contemplate.
That is the dilemma facing governments everywhere. There is now the prospect of relief on the horizon but there’s 2021 to navigate before — assuming the vaccine is successful and is successfully and widely distributed — the pandemic is behind them.
Economies are under severe pressure and the resurgence of the virus in the US and Europe can only increase that pressure.
Monetary policies alone can’t do much more than they have and are threatening to create new sources of instability and risk.
The US Federal Reserve Board’s twice-yearly Financial Stability Report, issued on Monday, warned of the threat to the economy, and asset prices in particular, if the worsening rate of infections continues over the coming months. Commercial property prices in the US are already falling and energy, travel and hospitality were particularly vulnerable, it said.
The nascent economic recovery could be derailed, especially if there were extended delays in the production or distribution of a successful vaccine, and financial markets could be strained.
High levels of leverage in the non-financial business sector could, if weak profits were prolonged, trigger financial stress and defaults.
The Fed noted that investor risk appetites and asset prices had increased in recent months – in or effect warning that markets aren’t pricing in the risk that either the pandemic continues to worsen or that the development and distribution of a vaccine may not go as perfectly as the markets appear to believe.
If a realistic timeline for the distribution of the vaccine in the US is adopted, it is apparent that there will be considerable further economic and financial stress unless the US Congress acts quickly and decisively to put a new and very large fiscal package into place.
The same need for government spending to tide economies through and take some of the load from central banks while avoiding further distortion of already-inflated markets applies almost everywhere.
That need for government spending (along with advice to US citizens to wear mask and maintain some social distancing to limit the damage done by the new coronavirus outbreaks) are challenges for the existing president and congress but Donald Trump seems somewhat distracted, although not so much that he didn’t try to take credit for a vaccine whose origins are in Germany and claim yet another conspiracy that harmed his electoral prospects.
Unless they can build bridges for the US economy between now and a comprehensive roll out of a vaccine sometime next year the great rotation seen in the stock market yesterday, as investors sold the tech and “growth” stocks that benefited from the pandemic to buy the “value” stocks it decimated, won’t last and the Fed’s warnings of stress and distress might be borne out.
Source: Thanks smh.com