A Shot In The Arm

By Piotr Matys of Rabobank

Matt Hancock says NHS workers will soon be ready to “inject hope into millions of arms this winter”

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— Rachel Wearmouth (@REWearmouth) November 10, 2020

For months global stocks have been driven by a very strong cocktail of ultra-accommodative monetary policy and substantial fiscal stimulus packages. More recently the prospects of a relatively calmer relationship between the US and China with Biden in the White House have also provided support to the markets. However, the most potent stimulant to impressive gains is a coronavirus vaccine, as witnessed yesterday. All major stock indices in Europe and in the US soared on the back of the news that the vaccine developed by Pfizer and BioNTech can prevent more than 90% of people from getting Covid-19. While this is undoubtedly great news that gives people around the world much needed hope of a gradual return to normality in 2021, vaccine specialists have warned that there are still unanswered questions regarding production, re-distribution and how long immunity lasts. The precise effectiveness of the vaccine may still change. The data shows that two doses are needed and have to be injected three weeks apart. This means that substantial amount of doses will be required to manufacture and distribute before a sufficient percentage of the global population is vaccinated. Pfizer and BioNTech say they will be able to supply 50 million of doses by the end of this year followed by around 1.3 billion by the end of 2021.

The S&P 500 and the DJIA ended yesterday’s session well below their intraday highs as investors realized that the vaccine developed by Pfizer and BioNTech still faces a number of thresholds and it will take time until Covid-19 is fully under control. Meanwhile, Europe and the US remain engulfed in the pandemic. The number of coronavirus cased exceeded 10 million in the US. President-elect Biden warned that the US faces a “dark winter” and announced a new coronavirus task force to regain control over the pandemic. The Fed warned that asset prices may fall if the economic impact of the pandemic worsens in coming months. With interest rates close to zero and QE fully deployed the Fed does not have much more room for manoeuvre to support the economy. Fiscal measures would be a far more efficient tool at this stage. However, the fiscal policy plans of the Democrats are likely to be stopped by the Republicans in the Senate, Philip Marey writes in his latest report. Philip expects two years of gridlock on domestic policy until the midterm elections of 2022.

In Europe, Hungary and Portugal became the latest countries to further tighten restrictions following the surge in coronavirus cases. People in Portugal must stay at home on weeknights from 11PM to 5AM. On weekends they are allowed to leave only in the morning until 1PM, unless to buy essentials at supermarkets. Hungary expanded its curfew to between 8PM and 5PM, closed restaurants (except for takeaway) and switched secondary schools and universities to remote learning. Similarly to other countries in Europe, Hungary also closed theatres, museums, cinemas and gyms. The set of stricter measures will last at least 30 days. In Poland, PM Morawiecki has warned that a full-lockdown could be around the corner if restrictions imposed over the last few weeks do not stem the second wave of the pandemic. The pace of recovery is set to lose momentum in Hungary, Poland and other European countries. A strong rebound in GDP growth in Q3 from the sharp contraction in Q2 will be followed by another leg lower in Q4. Economic activity may remain weak in Q1 2021 as well depending on the scale of the damage the second wave will cause to households and companies.

Undoubtedly the news regarding the vaccine is encouraging, but it will not prevent a potentially very harsh winter for Europe with severe consequences for economic activity. The markets have a strong tendency of dismissing any negative factors as for them the unprecedented liquidity provided by central banks is like a vaccine. But, there is still no widely available vaccine to prevent damage to the real economy and this provides the backdrop to the ECB’s policy meeting next month.

One of the challenges that President-elect Biden faces is to ease trade tensions not only with China, but also with Europe which will impose tariffs on USD 4bn of US goods from today. The EU trade chief, however, has indicated that he would rather negotiate a settlement with the US and would drop duties if the US removes the USD 7.5 bln tariffs imposed on EU goods in 2019. This could be a test of EU/US relations under Biden and a check on the market’s view that the new US Administration will favour rebuilding multinational relations following Trump’s uni-national approach. That said, the differences between the EU and the US on Airbus and Boeing subsidies have been dragging on for years.

Last, but not least, the UK government suffered one of its heaviest defeats in the House of lords for years last night. Peers voted by 433 to 165 to remove two clauses from the controversial Internal markets Bill that would break parts of the EU Withdrawal Agreement that PM Johnson signed at the start of the year. The PM has indicated that he will throw out the Lords’ amendment stating that it would be prepared to break international law to ensure trade between Britain and Northern Ireland remains unfettered in the event that a trade deal was not reached between the UK and the EU. Johnson’s decision could endanger a trade deal with the US. President-elect Biden has warned the PM that there will be no UK/US trade deal if the Northern Ireland peace process was destabilised.