Coronavirus Vaccine Lifts Stocks, Investors Eye Rising U.S. Cases
Last Week Review
Better-than-expected trial results from Pfizer’s coronavirus vaccine included an efficacy greater than 90%, compared to the roughly 60–70% efficacy expected. The positive news should help bolster public sentiment towards the virus and may lead to more widespread use of the vaccine once it is approved. The news helped drive global equities to a 2.3% weekly gain, and helped offset some resistance equities faced later on from concerns on rising U.S. cases. Interest rates also moved up with the 10-year Treasury yield ending the week at 0.90% after reaching its highest level since March mid-week. Finally, credit spreads tightened, with high yield spreads currently at 436 basis points.
Vaccine News Boosts Struggling Securities
Last Monday’s Pfizer vaccine developments led to sharp moves across a number of asset classes, especially those that have been struggling since March. Equity sector returns varied widely, with small losses in a few sectors compared to strong returns in year-to-date laggard sectors including energy (up 14.2%) and financials (up 8.2%). Some large airline and hotel stocks were up over 10% for the day, while a few large cruise line companies were up over 25%. However, many of these industries remain in a significant hole since the virus emerged. While they would benefit from an eventual return to more normal pre-virus activities, social distancing measures are likely to remain in place until at least mid-2021 and a successful vaccine will take time to distribute.
Investor Election Attention on Key January Senate Runoffs in Georgia
U.S. election developments in the past week were not market-moving, with Joe Biden continuing to plan his transition process and President Donald Trump continuing to signal he will pursue legal challenges. Outside of the two Georgia Senate races which will likely head to a January 5 runoff, the Senate outcome currently stands at 50 seats for the Republicans and 48 seats for Democrats. The Georgia runoffs will likely draw considerable media attention and investor interest. Meanwhile, states are in the process of certifying their election results, including a hand recount of all ballots in Georgia for the presidential race.
U.S. Inflation Remains Contained
The U.S. Core Consumer Price Index was slightly below expectations with a reading of 1.6% year-over-year. U.S. inflation expectations declined post-election, but reversed most of that drop early last week after the vaccine news. In other U.S. economic data, the NFIB Small Business Optimism gauge and a consumer confidence indicator were both close to prior levels, supporting the idea that the economy remains fairly resilient despite heightened risk from the rise in virus cases.
This Week Preview
Virus Trends Remain a Near-Term Financial Market Concern
The sharp rise in cases continues in the U.S., while Europe has improved somewhat. Additional lockdown measures may occur in large U.S. cities. Going forward, the public appetite for lockdowns is fairly low but this can quickly change if hospitalization capacity runs out. This means some stricter lockdowns are possible but a return to broad-based stringent lockdowns is unlikely. Given the improving financial market backdrop over the next twelve months and the near-term possibility of an approved vaccine, investors are more likely to look through some of the short-term concerns on the course of the virus.
U.S. Election and Fiscal Stimulus Outlook in Focus
Trump will likely continue with legal challenges in key swing states, but litigation and recounts are unlikely to shift the outcome in his favor. Investors will continue to assess election results, but are still expecting a divided government. Developments on negotiations for a late-2020 fiscal rescue package are also possible over the next few weeks.
Europe Inflation Data Expected to Be Steady
Inflation data will be released this week across Europe, the U.K. and Japan. The Europe and U.K. figures are both expected to remain very close to prior levels, while Japan inflation is expected to drop below zero. Elsewhere in Europe, Brexit negotiations remain under way though no specific deadlines occur this week.
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