It’s true that, eternal, hope springs
And sessions like this give it wings
The news, seemingly
Is twixt Trump and Xi
Less angst will lead to better things
As well, hope has grown, a vaccine
Is likely, this year, to be seen
Now bulls rule the roost
Thus, giving a boost
To stocks like a shot of caffeine
Another day, another round of stories seemingly designed solely to boost equity markets around the world. The first of these is a bit oblique, as the word from ‘insiders’ is that the Trump administration, despite its increasingly vocal hard line vs. the Chinese, is maintaining back channel communications, specifically regarding the WeChat app, and US companies’ ability to continue to use it in their advertising and marketing campaigns in China. This is important as WeChat is a critical advertising venue for virtually every company in China, and if the mooted ban by the Trump administration in the US was a world-wide ban, most US companies would see their Chinese businesses devastated. If we forget, for a moment, the convenient timing of these leaked comments, this is, unarguably, good news for those US companies active in China. Certainly, this is worth some added value to equity prices.
But let’s unpack the second story, the one about the vaccine. While this weekend saw an announcement for the approval of another treatment, convalescent plasma injections, the big prize remains a working vaccine that is both safe and efficacious. Briefly, the idea behind the plasma injections is that individuals who have recovered from the disease have antibodies in their blood, which can be separated and injected into severely ill patients in an effort to boost the patient’s own disease fighting capability. As in everything to do with Covid-19, it remains experimental and there is controversy as to how well the therapy may work. But given the desperation of some patients to get something done, the President has decided to overrule other voices and give emergency clearance. However, this is a treatment, not a preventative.
The vaccine remains the holy grail. To date, there are on the order of 180 different vaccines in various stages of development, 10 of which are in Phase 3 or have been given limited approvals. Clearly, pharmaceutical companies see this as the newest potential blockbuster drug. But the real question seems to be, even when (if) a vaccine is created, will it really change the nature of the spread of Covid-19 by that much? It is unambiguous that the market narrative’s answer to that question is a resounding yes. However, perhaps it is worth casting a skeptical eye on the idea.
Using influenza as our model, as it is the closest thing we have with respect to its contagion and even the structure of the disease and working under the assumption that human nature remains constant, the numbers don’t point to a vaccine as panacea.
Consider, in the US, roughly 45% of the population receives the flu vaccine each year. In addition, it is only effective for, at most, two-thirds of those who do receive the vaccine. Thus, the protective ‘shield’ that the flu vaccine creates is effective for roughly 30% of the population. One of the reasons we consistently hear so much every year about getting the flu vaccine via PSA’s is that the virology community calculates we need a greater percentage of the population vaccinated to achieve a herd immunity. And yet, the 45% inoculation rate has been pretty steady for years. Human nature is pretty hard to change.
This begs the question, will the take-up of a Covid-19 vaccine be higher than that for the flu? And if so, will it reach the level’s necessary to achieve herd immunity, thus encouraging governments to relax many of the current restrictions and people to resume some semblance of their former lives?
The argument for a higher take-up rate is that the media has gone out of its way to highlight the deadliness of Covid-19, in some cases exaggerating the numbers for effect, in what appears to be an attempt to sow fear in the population. The underlying belief to this strategy is to convince a large portion of the population of the criticality of receiving the vaccine once it becomes available. And perhaps this will be a successful strategy. But human nature has taken a long time to evolve to where it currently resides, and the case for a flu-like take-up rate, and thus a failure to achieve herd immunity, is based on the idea that unless one has been sickened already, or personally knows someone who has, it is hard to make the case that inoculation rates will increase over those of the flu vaccine.
Alas, my money is on the under. However, will that matter for the markets? That is an entirely different question, and one which speaks to confidence, not data. At this time, I would contend the underlying market belief is that a vaccine is going to be approved, and be effective, within the next twelve months. The result will be an end to the lockdowns and a resumption in economic activity worldwide that is much closer to the pre-Covid time. But if this is so, one needs to be careful that we are not looking at the biggest ‘but the rumor’ reaction in history, and that the approval of a safe vaccine could well be the proverbial bell for the top of the equity market. Remember, economic growth is still a product of population growth and productivity, and there is nothing about a Covid vaccine that will have increased either of those from pre-Covid days.
That exceptionally long discussion was driven by the remarkable ongoing rally in risk assets seen this morning. Equity markets in Asia were all higher (Nikkei +0.3%, Hang Seng +1.75%) and Europe is really on fire (DAX +2.3%, CAC +2.15%). US futures are currently 1.0% higher and climbing. Bonds are under modest pressure, with 10-year yields higher by 1 basis point in the US and most of Europe. Oil prices, along with gold, are higher by 0.5%-0.7%, modest by their recent standards. And the dollar is definitely under a bit of pressure.
In the G10 space, SEK and AUD lead the way, both higher by 0.5%, although the gains are fairly solid across the board. In fact, despite extending the lockdown in Auckland, NZ, kiwi has retraced early losses and is higher by 0.25%. In the EMG bloc, ZAR leads the way, up 1.2%, as the combination of risk positive stories and higher commodity prices continues to encourage investors to buy South African bonds. But virtually the entire space is firmer this morning with two outliers, KRW (-0.25%) which fell after the central bank downgraded the economic outlook further, and TRY (-0.8%), which continue to see capital flee as the central bank is prevented by President Erdogan from raising rates.
There has been virtually no data today, and in truth, all eyes will be on Chairman Powell Thursday morning, when he speaks at the virtual Jackson Hole gathering. Expectations are he is going to outline the new Fed framework, with a higher inflation target, and other potential changes. But we will look into that later this week. As for today, I see no reason to believe that the current risk attitude is going to change, so further dollar weakness is likely on the cards.
Good luck and stay safe