Equity markets have started the New Year hesitantly. The base case that the pandemic’s end is in sight, with life more or less back to normal by the summer, is imperilled by stricter lockdowns and slower than expected vaccine distribution.
The first trading day of the New Year saw US stocks register their worst decline since October as rises in the coronavirus caseload raised the prospect of more onerous lockdown measures in some of the world’s largest economies. The appearance of new, more contagious, variants of the coronavirus in the UK and South Africa in mid-December will potentially aggravate the pandemic’s impact.
Although, so far, they do not seem to be any deadlier, these mutations seem to be more contagious. For every ten people that previous variants would infect in the UK the new one infects 15.
As a result, to prevent hospitals being overwhelmed by a surge in admissions, the UK government has been forced into the re-imposition of a strict lockdown, including closure of schools until mid-February. Germany also extended its lockdown until the end of January as it battles to control an upsurge in new infections. In the US, sharp rises in the COVID-19 caseload and mortalities have led several states to impose new restrictions to ensure hospitals can cope.
So far, only sporadic cases of the COVID-19 variants have been found in 25 or so countries, including in the US. But this is probably because, unlike the UK and South Africa, most countries do little genomic sequencing to look for such mutations.
Governments are targeting to receive vaccines for more than 70% of the population by second quarter 2021 (the US, UK and Japan) and third quarter 2021 (EU and others). Vaccination started in the UK, US, Canada and EU in December. However, the actual pace of inoculation has been slow compared to governments’ targets in the US and UK. Within the EU, vaccination in France has lagged behind other members. Governments are aiming to accelerate the pace of vaccination for priority groups in the first and second quarters of the New Year and then among the general public in the second and third quarters. Higher transmissibility of the new variants of COVID-19 could imply a higher minimum requirement of vaccine coverage. The base case remains that some form of herd immunity by vaccination could be achieved by the fourth quarter among developed economies.
Among emerging markets (EM), vaccine supply varies by the size of population and bilateral deals. China, Singapore, Mexico, Argentina, Chile, EM EU members, Russia, Israel, Saudi Arabia, Morocco, UAE, Bahrain, Kuwait, Qatar and Oman are among the countries that have started the rollout of vaccines. China plans to vaccinate 50 million people (3.5% of the population) including healthcare workers before the Chinese New Year in mid-February. India aims to vaccinate 300 million people (22% of the population) in the priority groups by August. Israel and Chile could finish vaccination as early as second quarter 2021.
To summarise, vaccine day euphoria may have been premature. It is becoming clear that even with an effective treatment, getting doses to enough people to deliver herd immunity across the world will be a major logistical task that may take longer than expected.
January 5 saw the two run-off US Senate elections in Georgia that were triggered after none of the candidates earned more than 50% of the vote in the 3 November general election. The Associated Press has already declared a win for Democratic challenger Raphael Warnock, while results for the other run-off election are still outstanding.
A double victory for Democrat candidates would give control of the Senate to the Democrats and allow another multibillion dollar round of fiscal stimulus including cheques to households, and support for small businesses and the unemployed to be passed by the spring.
Later this year, or in 2022, an infrastructure bill or changes to healthcare paid for by higher taxes could then pass. However, significant legislative changes in areas unrelated to fiscal policy look unlikely. For a full analysis of the implications of a Democrat victory read the analysis by Mark Allan, our US economist, here.
The most direct impact of the news from Georgia has been on US Treasuries. Following the Georgia run-off the yield of the 10-year US Treasury bond went through the 1% level for the first time since March (see Exhibit 1 below). The US Treasury yield curve has steepened with the curve between 2-year and 10-years now at its steepest since 2017. It would appear that the prospect of a unified Democratic government under Joe Biden is reviving hopes of reflation.
One crucial question for 2021 is whether this will go beyond a healthy reflation that buoys the post-pandemic economy, and surge into inflation. We (and the market) expect the former, not the latter. Our anticipation is that the economy will recover while any rise interest rates remains limited. Stay tuned because developments on the inflation front will be crucial for investors in 2021.
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