The market reaction to positive news on a COVID-19 vaccine tempered by a significant spike in US infections and the threat this posed to the economy with no progress on more fiscal stimulus

14 November 2020 | Shane Oliver, AMP Capital

The past week saw very good news on the coronavirus vaccine front with early results from Phase 3 testing of a Pfizer/BioNTech vaccine showing 90 percent effectiveness within the first month of receiving the vaccine.

Effectiveness of 90 percent is at the high end of vaccine success and would contrast with flu vaccines which are often just 50 percent effective (due to multiple strains of flu). The combination of massive policy stimulus along with the successful deployment of vaccines raises the prospect of a supercharged rebound in the global and Australian economies in 2021.

That said there is a fair way to go yet. The results are yet to be peer reviewed, we don’t know how long protection lasts and whether there may be resistant strains of coronavirus (via minks?) more results are needed regarding the vaccine’s safety and while distribution could start in months if its approved it will probably take at least 6-9 months for broad enough coverage in developed countries (longer for the whole world) to get back to normal.

Markets rise

Global share markets rose further over the last week helped by positive news regarding a vaccine for coronavirus but gains were reduced later in the week by rising US coronavirus cases and the threat this posed to the economy with no progress on more fiscal stimulus.

Australia shares rose sharply again helped by the positive global lead, a surge in energy stocks on the back of higher oil prices, corporate restructuring pushing up Telstra, and strong gains in industrial, financial and property stocks. Bond yields generally rose reflecting the risk on tone despite talk of more monetary easing in Europe and the US. Commodity prices were mixed though with oil and iron ore up but copper and gold down. The $A fell slightly as the $US rose slightly

Infections surge

The problem right here right now is that we are continuing to see a surge in global coronavirus cases. Emerging countries have been faring better lately (although I wonder about how reliable that is). Europe looks to be seeing a slowing in new cases possibly reflecting tightening lockdowns – with clear falling trends now in Belgium and the Netherlands and tentative signs of a slowing in Spain, France and Germany. However, there is no sign of any slowing in the US (which is now running at the rate of a million new cases every 8 days) and even Japan looks to be going through a third wave.   

While deaths in the US remain well below prior peaks the rise in hospitalisations to a new high is putting increasing pressure on the medical system indicating a rising risk that as we have seen in Europe some areas may be forced to tighten restrictions despite political and economic opposition. In fact, we are already starting to see that. A Biden Administration may take a tougher more comprehensive stance early next year to this if new cases haven’t started to trend down by then.

Developed nation economic activity dips

European economic data is slowing down again in response to the surge in new coronavirus cases seen since August and more recently the return to lockdowns. This is evident in our (newly constructed) European Economic Activity Trackers which are seeing a broad-based slowing.

Our US Economic Activity Tracker dipped again with broad based weakness over the last week adding to the likelihood that the resurgence of new coronavirus cases in the US is starting to slow the economy. 

Australia is continuing to see new coronavirus cases stay very low with hardly any cases of community transmission and deaths have collapsed. Our Australian Economic Activity Tracker rose further over the last week and is trending up nicely helped by Victoria’s reopening consistent with ongoing recovery. Credit card transactions have accelerated sharply (driven by Victoria and NSW) in the last week or so but the gains in the Tracker have been broad based. 

US election confusion

In normal times, the US election would be fading into history and we would be solely focussed on what a Biden Administration will mean. However, with SuperSpreader in Chief Trump these are not normal times—one study has linked over 700 COVID-19 deaths to Trump rallies and that was just up to September.

Meanwhile, Biden is now more than five million votes ahead of Trump and looks like winning with between 290 and 306 electoral college votes. Normally the loser would have conceded by now but Trump never committed to accepting the result if it went against him and set up grounds to discredit it months ago by claiming mail in votes were fraudulent (as he knew Biden voters were more likely to vote via the mail). So, his refusal to concede is not that surprising.

Trump’s strategy appears to be a combination of: hoping that he wins Arizona where Biden’s lead has fallen to 0.3%; legally challenging results in Pennsylvania, Michigan and Wisconsin; possibly convince the Georgia Secretary of State to refuse to certify its result (which is now being recounted under Georgia law anyway); maybe convince Republican state legislatures that the result was fraudulent so they should appoint their own pro-Trump electors to go to the electoral college vote; and maybe get the House of Representatives to vote on who won.

At this stage apart from possibly winning Arizona its very doubtful that any of these will work. While comparisons are being made to the year 2000 challenge to George W Bush’s result, Al Gore was only around 500 votes behind Bush in Florida whereas Trump is 11,000 votes behind in Arizona, 14,000 votes behind in Georgia, 20,000 votes behind in Wisconsin and 55,000 votes behind in Pennsylvania. 

Taxing people to stay at home?

Should people who work from home be levied a higher tax rate – either directly if they choose to work from home or their companies if they force them to?

I saw a suggestion along these lines in an article based on a Deutsche Bank report. The logic is simple – people who work from home get a benefit in terms of better work/life balance, less travel time, etc and save money in the process which hurts the economy so maybe they should pay for that benefit via a tax.

At first, I thought yeah maybe; but then it could be argued they are good for the planet as they contribute less to carbon pollution by commuting less so maybe they should get a tax cut. More fundamentally it’s a whacky idea because if there was a benefit in working from home market forces will work out what it is and it will be priced into wages (ie lower wages relative to those who have to go to into work), the financial saving from working from home will be re-allocated to other forms of spending (like less on wasteful commuting costs and more on holidays) and why should the government need to intervene in all of this with an arbitrary tax. So, the answer I think is no!

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital