Investors are over the moon
And singing a happy new tune
As Pfizer’s vaccine
Has come on the scene
And raised hope we’ll soon be immune
The market responded with glee
As pundits now seem to agree
With gridlock ahead
The vaccine, instead
Will rescue our economy
Frankly, it is hard to keep up with the narrative shifts between yesterday and today as there have been so many new opinions about how the future will unfold. As I was completing this missive yesterday morning the Pfizer vaccine news hit the tape. Certainly, the market was unprepared for an announcement that a vaccine with 90% efficacy was in late stage trials, implying that it could soon be approved, and distribution begun. Hopes for a vaccine had been a key driver of markets on many days in the past several months, although market rallies were ostensibly keyed by hopes for many things like a blue wave, gridlock, and if you go back far enough, a trade deal. However, the news of the success triggered a stupendous rally in equity markets and risk assets in general while haven assets, especially Treasuries, Bunds and Gilts, along with the yen, Swiss francs and gold, all sold off sharply. Yesterday, I was cynical regarding the end of the pandemic being at hand, but this morning, that outcome has far more promise.
Of course, the real question is, if this vaccine truly does work, and is distributed widely enough to instill confidence in the general population, how much has the economy actually changed and to what degree are those changes permanent?
Clearly, the biggest change has been the recognition that working from home, for many jobs, is quite viable. Technology has reached the point where meetings via Webex or Zoom or Partners seem to be quite productive (at least as productive as any meetings ever are.) My personal experience is that I have gone from driving nearly 2000 miles per month, largely for commuting, to having driven 3000 miles in the past seven months. Not only have I used significantly less fuel, but my car has seen dramatically less wear and tear, and thus any replacement has been postponed accordingly. And that is just one facet of the changes. Commercial real estate and office buildings will likely need to be repurposed going forward as the requirement for corporate staffs to all gather in a single premise has been shown to be unnecessary.
But what about travel and entertainment? With a vaccine, does that mean people will be jumping back on airplanes to visit clients or relatives or go on vacation again? Is the movie theater experience ever going to be as desirable again? After all, given the remarkable array of streaming entertainment services, and the fact that TV’s have grown so remarkably large, watching at home has many advantages over going out, so what percentage of the population will be heading back out soon? In truth, the one segment I expect to really benefit is restaurants, as while it appears people embraced preparing food at home, I expect the ability to go out, eat and not have to wash the dishes has real appeal to a majority of the population.
My point is the dynamics of economic activity going forward are likely to be very different than that which we remember from before the pandemic and its attendant lockdowns and disruptions.
Of more importance to our discussion here, what does this mean for the central banks going forward. Remember, Chairman Powell has essentially promised not to raise interest rates until 2023, a minimum of 2+ years from now. But what if economic activity takes off, as people find a new mix of activities and regain the confidence to gather when desired. If growth rebounds and inflation (which is already picking up) continues to rise, will they stand pat because of that promise? Will the ECB? The BOJ? The BOE? Quite frankly, I believe the central bank community was quite happy with the current situation. They were largely lauded as heroes for preventing even worse outcomes, they had significantly increased their power and sway within governments, and the playbook was easy, print lots of money and buy bonds (or other assets) to support market functioning. Not only that, they could carp at governments for not implementing fiscal stimulus and the intelligentsia all agreed!
But if this vaccine really is the difference maker, and people return to some semblance of their pre-covid activities, suddenly, central bank largesse may no longer be needed. And if they continue their current policies and inflation starts to really pick up, they will be the ones being lambasted for their actions or delayed reactions. While it is very early day(s) in this new story, it is the first time since before the financial crisis where central bankers may find themselves the targets of wrath, rather than the saviors of the world. (People wonder whether Chairman Powell will be reappointed; quite frankly he may not want the job!)
With all that in mind, how have markets behaved since the news hit the tape? Yesterday’s equity market performance was quite interesting, as the early euphoria (DOW 29933) reversed and stocks wound up closing much lower, with the NASDAQ actually falling 1.5% on the day. There was also a huge rotation from the previous winners (Mega cap tech companies) into the previous losers (value and transportation stocks). Asia followed suit with a mixed session (Nikkei +0.25%, Hang Seng +1.1%, Shanghai -0.5%) and Europe has also lacked some direction. For instance, the DAX is unchanged on the day while the CAC has rallied 1.1% despite horrific IP and Labor data. Spain is much firmer (+2.2%) and Italy has fallen (-0.25%). In other words, this is not a vaccine driven market, rather it has to do with some pretty lousy data out of Europe. The US dichotomy continues with DOW futures higher by 0.6%, SPX futures basically unchanged and NASDAQ futures lower by -1.6%. Perhaps there was a bubble in some of those stocks after all.
Bond markets continue to sell off everywhere, except Greece, as the narrative here is quite clear; vaccine => rebounding economic growth => less central bank policy ease => higher rates. So, this morning 10-year Treasury yields are up to 0.94%, 2 basis points higher than yesterday after a 10-basis point rise yesterday. But we are seeing yields higher between 1 and 3 basis points throughout Europe as well. The question to ask is, Is the ‘new vaccine makes everything better’ narrative realistic or overdone, and just how long before economic activity actually starts to rebound?
Finally, the dollar can only be described as mixed, but leaning stronger. Ignoring TRY (-2.0%) which is what we should always be doing, the EMG markets have more losers than winners with ZAR (-0.7%) and PLN (-0.6%) leading the way. On the flip side, THB (+0.5%) and CNY (+0.3%) are both performing reasonably well. If anything, it is hard to cobble together a consistent story as to why any of these currencies are moving in their current direction given the inconsistencies.
As to the G10 space, there have been two gainers of note, GBP (+0.65%) and NOK (+0.5%), with only CHF (-0.3%) showing any real weakness. The rest of the bloc is little changed overall. NOK is benefitting from the ongoing rally in oil prices, up another 1.5% this morning, which takes the move since Thursday to a 5% gain. As to the pound, comments from the BOE’s Chief Economist, Andy Haldane yesterday seemed to change the market’s view as to the possibility of negative rates in the future. By calling the vaccine a “game changer” he implied future central bank actions were likely to be less aggressive.
On the data front, the NFIB Small Business indicator was released right on expectations of 104.0. Beyond that, we only see the JOLT’s Job Openings data, but that is for September, so has very limited appeal in a market that is seeing massive changes daily. As mentioned above, Eurozone data was generally lousy, with both French (-6.0% Y/Y) and Italian (-5.1% Y/Y) Industrial Production disappointing and French Unemployment rising to 9.0%, its highest level since 2018. As well, German ZEW Surveys were quite weak, with Expectations falling to 39.0, far lower than expected.
And so we have a market that needs to look through worsening recent data to the potential for a dramatic change regarding the vaccine and its ability to help economic activity find a new normal. My view is we have seen significant excesses in many markets during the past several months and years, and there is every chance a significant amount gets unwound. I do believe volatility will remain with us for a while, as there are many possible outcomes. But in the end, while the dollar will have bouts of both strength and weakness, the one thing that will not happen is a collapse.
Good luck and stay safe