Vaccines trade war – how big a threat?
Last week was another week of drama on the vaccine front with threats of a trade war; a war in which everyone will lose. This week is a big week for economic data, which could confirm the US economic boom and may well show the early signs of a UK boom. And we’ll look at why we might perversely see the selling of US equities and the buying of US bonds in the next few weeks.
Let’s start with the vaccine trade war. All the headlines are about the tension in the EU, who are threatening to single out the UK and AstraZeneca. Post Brexit relations were strained before this latest development; it could get nasty. All of the AstraZeneca vaccines for the UK are made in the UK, but the supply chain is global – including a key ingredient from a factory in the Netherlands. If the EU do impose a ban, it won’t directly generate a single dose for them. They are using it to pressure AstraZeneca to divert supplies destined for the UK to the EU.
Would this rescue the EU’s disastrous roll out? Unlikely: as they have piles of the AstraZeneca vaccine unused because of resistance to their use which has risen markedly due to national politicians. What the situation could do, is slow the vaccination programme in the UK, we don’t know for sure but we think the impact would be minimal. The UK actually stepped up the number of doses last week, and the UK is also believed to be well advanced in tweaked versions of vaccines to fight the South African variant – something the EU will also need.
Much less publicity has been given to the Biden administration’s blanket ban on US exports of vaccines and vaccine ingredients. This is part of the reason why India has delayed 5 million doses destined for the UK.
Who is winning the vaccination race?
Bloomberg as at 22nd March 20021
If we look at the numbers in the chart, we can see that the US has narrowed the gap with the UK, it is set to overtake if there are any delays to the UK’s vaccination programme. But both are on course to offer a vaccine to the whole adult population before the summer. In contrast, the EU will be lucky to get to that point by September. And there are likely to be many more vaccine refuseniks in Europe than in the US. The UK will have fewer still. The implications could be profound.
What will the economic impact be…?
This week we get the closely watched Purchasing Managers’ Indices (PMIs). The US PMI has already hit boom territory, courtesy of massive fiscal handouts and the fact that they’ve already eased lockdowns. I calculate that, in aggregate, the US consumers have almost one year of extra income sitting in the bank, available to spend. Quite stunning. Mind you, the easing of lockdowns means that the decline in new cases has stalled, and we’re beginning to see a slowing in the rate of decline of hospitalisations. It’s basically a race between lockdown easing and vaccination.
The UK is in the same race but is better placed, in my opinion. We have only just started easing and look set to have a surge in economic activity in the second quarter. I think we’ll see this in the PMIs on Wednesday. It may be too early but we’re in for a big jump, either this month or next, on the non-manufacturing index, from below 50 to over 60 by May. In contrast, EU will remain mired in recession.
…and how will it affect financial markets?
With the US economy booming, fuelled by massive fiscal spending, you’d expect this to be bad for bonds and good for equities. But in the next week or two, there is a powerful countervailing force: rebalancing. Several trillion dollars of pension funds and other similar funds are in balanced portfolios, with fixed percentages in bonds and equities. With bond prices having fallen heavily so far this quarter, and equities having risen so far, there’ll be significant selling of equities and buying of bonds. Whether this will be powerful enough to offset the fundamental forces going the other way, I don’t know. But it’s certainly making me cautious about selling bonds, especially in the US, in the near term. None of this should prevent the euro from weakening. Political turmoil and recession are rarely positive for any currency.