It’s been another week of progress in equity markets, albeit at a more muted pace than recent weeks. Sentiment was once again bolstered by more positive news on a Covid-19 vaccine, even as case numbers in the US continued to worsen. The week comes to a relatively quiet close, with the US Thanksgiving holiday meaning market volumes are thin.
The Covid-19 pandemic continues to have echoes of the summer, with case numbers across Europe appearing to have peaked and restrictions being eased, while in the US case numbers and hospitalisations continue to rise. While we have seen some restrictions being increased in the US in terms of closing down or restricting hospitality venues, the policy mix remains fragmented and there are notable concerns that the travelling and mixing associated with Thanksgiving holiday will further increase the rate of spread. The Canadian Thanksgiving holiday in early October, which caused a surge in cases in the aftermath, is cited as a template for what could come next in the US, and potentially across many western economies in the aftermath of the Christmas holidays, which may reverse declining trends in case numbers if households mix indoors in regional where the virus is still widespread.
Equity markets appeared to pay little attention to the continued case growth – US equities saw fresh all-time highs this week, as investors focussed on the positive outlook around the vaccine rather than the worsening case numbers and potential economic fallout from tighter restrictions. In the UK, the government announced an end to the lockdown in England from next week, with a return to the Tiered system that preceded the lockdown, with a few changes, along with a relaxation of the rules for Christmas. For the third week in a row, Monday brought more vaccine news, this time with the release of the preliminary Phase III data from the Oxford/AstraZeneca vaccine trial, which showed an overall efficacy rate of 70% in a trial on 20,000 people in the UK and Brazil. Depending on dosage, the efficacy rose to 90%, though the ‘half dose followed by full dose’ method that achieved the higher efficacy rate was only conduced on a small number of participants and seemingly by accident. While the 70% headline level may appear ‘disappointing’ in the context of what we have heard from Pfizer and Moderna in recent weeks, it should be remembered the threshold for approval was an efficacy rate of 50%, and even this level is above the efficacy rate for the flu vaccine, which is around 44%. The Oxford/AstraZeneca vaccine is also substantially cheaper than its rivals and is easier to roll out given it can be stored in a fridge. Hence, this vaccine will still have a substantial role to play in the immunisation process over the coming months.
The huge fiscal costs of the pandemic were clear to see in the UK Public Spending review, put before Parliament by Chancellor Rishi Sunak on Wednesday. The OBR (Office for Budgetary Responsibility) forecast a deficit in this financial year of 19% of GDP – a peacetime record. The government is set to borrow £394bn this financial year, with debt reaching 105% of GDP. The OBR expects the economy to contract by 11.3% in 2020, and then a recovery of 5.5% and 6.6% in 2021 and 2022 respectively. These forecasts assume a trade deal with the EU and a smooth transition. The OBR does not see the UK economy back to pre-pandemic levels before the end of 2022, or even longer in the event of a ‘no-deal’ Brexit outcome. The Chancellor said “we have a responsibility, once the economy recovers, to return to a sustainable fiscal position” but there is little political or market pressure in the short term, not least given other countries are facing similar challenges.
In terms of the Brexit talks, it appears little progress has been made while the talks have been taking place online due to a positive Covid-19 test in the EU negotiating team. Talks can now resume in-person, though Michel Barnier earlier in the week said there was “little point” in him travelling to London unless the UK was prepared to give ground. Talks will continue this weekend, and Michel Barnier is said to be travelling to London later today. European Commission President Ursula von der Leyen told the European Parliament on Wednesday that “I cannot tell you today if in the end there will be a deal” and said that while there had been genuine progress on a number of issues, the usual sticking points remained around the level playing field, fisheries and governance. Earlier in the week there was talk of a “significant intervention” being planned by Boris Johnson in speaking with or meeting Ursula von Der Leyen to “clear away final barriers” towards a deal. There was also talk that the key to unlocking the remaining sticking points would to be to include sunset clauses or review dates in the future for potential amendment – an element of kicking the can down the road, but if this allows the UK to avoid the difficulties associated with ‘no-deal’, this would be a relatively positive outcome. The lack of a sense of crisis, despite the transition ending in 35 days, means that these issues may yet drag on for another week or so. December 8th appears to be a hard deadline given the need for ratification in both the European and UK Parliaments, so it still seems like the endgame is almost upon us.
Market sentiment in the US was boosted by news that the Trump administration had begun to co-operate in the transition process to the Biden administration, even as the former continued to contest the election outcome across various states in the courts. Trump said he would continue to “fight” but said he had recommended the General Services Administration to “do what needs to be done with regard to initial protocols”. This has involved releasing funds to the Biden team and giving President-elect Biden access to Presidential Briefings. Sentiment was also boosted by the news that Janet Yellen was set to be announced as Treasury Secretary. Yellen is seen as a very ‘market friendly’ appointment, having previously served as Chair of the Federal Reserve before Jay Powell. A combination of Yellen at the Treasury and Powell at the Fed is seen as an environment where monetary and fiscal policy are aligned, and there is the potential for the recently announced closure of the emergency lending facilities that helped stabilise markets earlier in the year to be reversed. In the short term, the need for a fiscal package in the US is becoming increasing urgent as the pandemic worsens and economic momentum wanes. However, there seems like there is still very little progress being made in Washington, despite the encouragement of both Joe Biden and Donald Trump for a compromise to be reached.