(Gary Gleeson)
Principal | MFM Group
The risk to growth from the current US COVID wave must be watched. However, we still see plenty to support equity markets through to the end of the year, including policy stimulus, economic resilience, strong liquidity, and the prospect of good corporate earnings growth as previous weakness is cycled.
Vaccine news
There was positive news on the vaccine front last week, with Moderna’s interim results showing 94%+ effectiveness. Pfizer also updated their results to show a similar outcome.
This is good news for the economy and markets. From here, several factors need consideration:
- Side effects: Initial data looks reassuring on this front, particularly for Pfizer. A small subset of trial patients reports some minor irritation, but at this point there seems nothing too serious.
- Impact on older patients: Data indicates that older cohorts are so far responding well to vaccines.
- Durability: This is still to be determined. Time will tell, but indications on immunity thresholds suggest it should work for at least a year. Manufacturing and distribution: The combined expectation is that Moderna and Pfizer will have 70 million doses available by the year, which can be used on 35 million people (each vaccination requires two doses). About 70% of these doses are expected to be used in the US. The area to watch is the production ramp-up. Moderna are saying they will ramp from 7 million doses per month now to between 50 million and 80 million by mid-2021. This means widespread vaccination will be possible by the June quarter.
- Take-up of vaccine: Surveys indicate the high vaccine efficacy rate is increasing the propensity for people to take it.
- Virus changes: The potential for new strains of COVID – and the impact on vaccines – remains a key unknown.
The next expected developments include emergency approval for Pfizer’s vaccine – anticipated by end of the year. AstraZeneca’s interim results are also expected in the next two to three weeks.
COVID outlook
The focus is on how things play out in the US. Rolling average daily new cases continue to climb, but at a declining rate — up 25% week-on-week versus 40% the previous week. However, bottlenecks are emerging in testing capacity, which is reflected in case numbers and in a continued increase in the proportion of positive test results.
US hospitalisations increased 20% week-on-week — a marginally slower rate than the previous week. Patients remain spread out geographically and we are still seeing spare capacity in the system. However, the next two weeks will be critical. Some modellers are predicting an acceleration in cases and hospitalisations, partly due to the Thanksgiving holiday.
Case trends continue to improve in Europe. At this point Europe seems to have avoided a crisis in the hospital system. France appears to be turning around, which supports the case that better treatments and protocols are helping manage the scale of the crisis.
Policy outlook
The Trump administration’s treasury secretary last week declined to approve beyond January 1 the facilities that have been the back stop of credit markets. This means the Fed will no longer be able to buy corporate credit, provide main street loans or municipal loans.
The Treasury is also asking for the return of unused capital. Originally the Cares Act pledged $454 billion to the Fed, which could be leveraged up. To date they have received about $100 billion.
While the extension can be re-approved under Biden’s administration, the bigger issue is that the returned funds would not be immediately available. They would remain locked up until Congress authorised them. The Fed has some access to other funding sources via the Exchange Stabilisation Fund. But this is in the region of $70 billion – far less than the existing package.
While markets continue to function normally this should not present a major issue. But it adds to the downside risk of negative events emerging. It is also likely to encourage the Fed to do more Quantitative Easing.
Another negative on the horizon is a further step down in fiscal support as jobless benefits expire for another 7 million to 12 million workers. This equates to $35 billion to $70 billion less fiscal stimulus in the first half of 2021.
The last step down was relatively benign, as households drew on elevated savings rates to smooth the effect. Any fiscal deal may also restore some version of these payments. However, this risk needs to be watched in the near term.
Economy outlook
Rising cases and shifting behaviour are having some effect on US economic indicators. But activity is so far proving more resilient than many had feared.
The Atlanta Fed’s GDPNow real GDP estimate is improving. Its most recent prediction is 5.6% GDP growth in Q4 – well above consensus – driven by strength in housing, retail sales and industrial production.
Elsewhere, the weekly US Consumer Comfort index rose to a new post-pandemic high, probably helped by the election and vaccine news. Existing house prices rose 15% in October, implying a US$10 trillion gain in consumer net worth.
In combination with increasing money supply (still up 25% year-on-year), tight credit spreads, stronger copper prices and the scope for better corporate earnings, it suggest that while sentiment is nervous, there are plenty of supportive factors at play in markets and the economy.
Yours faithfully,
Gary Gleeson
BBus(Ec&Fin), MAppFin, CFP®, SSATM
Principal | MFM Group
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