Weekly review: Risk on Rally to continue despite vaccine setback

Macro Update 8 February 2021
February 2021
Steven Bell

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions


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Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Key takeaways

Before I discuss the latest news on the AstraZeneca vaccine, let’s consider the fundamental backdrop for risk assets. Last week, I talked about the push and pull on equities: the vaccine roll-out and the prospect of lockdowns easing versus the fear of inflation that could push bond yields higher.

In the event, equities rose strongly last week with the S&P500 and the Nikkei up by close to 5%. The FTSE 100 lagged, up just 1% or so, but UK smaller cap stocks performed much better. All this despite bond yields rising strongly: 10-year yields up 10 basis points (bps) in Germany, 11 bps in the US, and almost 20 bps in the UK following a relatively hawkish Bank of England meeting.

Increased volatility to come, but equities should move higher

One of the key driving forces behind this was the super strong reporting season for US earnings. A record number of companies are beating estimates for earnings and revenues and the overall beats are big. There is a reasonable chance that S&P 500 earnings will show positive year-on-year growth, despite the pandemic. That’s quite remarkable. And with the Biden administration gunning for yet another big fiscal stimulus package, a successful vaccine roll-out and lockdown restrictions beginning to be gradually eased in the US, there is more good news to come. The question is: how far will this boost bond yields and take the edge off the rally? We expect more volatility in the market but overall, the good news on the economy will win out and push equities higher.

Bad news on virus variants could unsettle markets…

But what about the bad news on the AstraZeneca vaccine? The New York Times called it devastating. There seems little doubt that the South African variant is more resilient to the AstraZeneca vaccine, and probably other vaccines too, in terms of relatively mild illness from Covid-19. That probably means they won’t limit transmission as much as had been hoped. But they are still probably effective against preventing serious illness and hospitalisation. And the efficacy against the dominant strains in Europe, the UK and US remains very good. So efforts to keep the South African variant out of the UK will be redoubled. That means more travel restrictions and door-to-door testing in areas where the variant has been detected. So far we have found less than 150 cases.

…but efforts have been made to contain variant spread, and initial data is good

If – and it’s a big if – we can contain this variant, the news for the UK is very good. Remember that the government’s biggest fear was that the NHS would be overwhelmed. That’s why the post-Christmas lockdown has been so severe. And the response has been great. New cases of Covid admitted to hospitals peaked on 10 January, the total number in hospital with the virus peaked 9 days later at just under 40,000, since then there’s been a 25% fall. This is very close to the modelling done by Morgan Stanley at the beginning of the year. And those projections show the numbers will fall below 10,000 early next month. At that point, provided we are on top of the South African variant, restrictions should be eased. Schools and non-essential shops would reopen in March, with hospitality and leisure in April. For once, the government plans are holding, vaccinations may be delayed a little by the recent bad weather but the roll-out is well ahead of schedule and accelerating.

It’s rarely the case that all the news points one way in financial markets, and the news regarding the South African variant on the AstraZeneca vaccine is troubling. But overall, we appear to have a positive background for risk assets, and a negative one for bonds.

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