Global Stocks Rise on Vaccine Progress, Governments Consider More Stimulus
Trial data for Moderna’s experimental coronavirus vaccine showed promise. Europe, Singapore and the U.S. may progress on new economic stimulus.
Last Week Review
Moderna publicized promising results from early-stage trials for a virus vaccine, propelling U.S. equities 3.4% higher on the day of the announcement. Risk assets also received a boost from reinforced support from monetary and fiscal policy leaders across the globe and early signs that major economies are restarting. Economic data showed continued improvement, albeit from historically depressed levels. Global equities consolidated gains on U.S.-China tensions, but still ended the week up 2.9%. Credit conditions notably improved, with high yield and investment grade spreads contracting 77 basis points and 21 basis points, respectively. High yield spreads were partially aided by higher oil prices.
Vaccine Progress Resurfaces as Economies Restart
Initial Phase 1 trial data for Moderna’s experimental vaccine showed early signs that it can help fend off the virus. Although encouraging news, questions about the efficacy and safety of the vaccine still exist — they should be answered through larger trials over the coming months. Every U.S. state has moved forward with gradually lifting lockdown restrictions, with some major auto manufacturers restarting production. Investors should continue to cheer progress on the virus treatment and economic restarting front. However, as social distancing efforts relax, investors will stay honed in on new virus case data.
Policy Support Strengthens Alongside Trade Tensions
Federal Reserve meeting minutes, as well as commentary from Fed leaders, showed the central bank can and will continue to ease monetary policy, with further action now expected in September. France and Germany agreed to support a €500 billion European Union recovery fund. The act, a signal of European Union cohesion, opens the door for agreements on more substantial fiscal stimulus in the near future. In contrast, tensions continued to rise between the U.S. and China. U.S. President Donald Trump further blamed China for the virus’s spread, and the Senate passed a bill that would prohibit some China companies from listing on U.S. stock exchanges. As monetary and fiscal policy continue to support risk assets, trade tensions are proving to be a significant headwind.
Corporate Earnings Under Near-Term Pressure
S&P 500 Index aggregate earnings have fallen 7.7%, with 96% of companies reporting. Given that the economic shutdown was a small portion of the quarter, the earnings drawdown has been slightly more than many investors initially projected. Near-term corporate earnings are expected to remain under pressure as the virus and its associated economic costs linger. For now, investors are hopeful profit impairment does not extend beyond the next couple of quarters and consequently push down 2021 earnings estimates further.
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Public Health Measures Key to Curtailing Virus Reacceleration
Despite billions of dollars being poured into development efforts, significant challenges still exist in developing, manufacturing and distributing a safe and fully effective vaccine over the next year. Over the coming months, the pharmaceutical industry will release vaccine trial data that may provide a positive surprise. Until then, public health measures will likely be the main weapon against the pandemic as lockdowns ease.
Governments Looking at More Stimulus
China’s National People’s Congress concludes mid-week as investors await more policy announcements. Last week, China outlined new security legislation for Hong Kong, adding to U.S. tensions. The European Union may release a new recovery fund proposal, while Singapore is expected to announce more fiscal stimulus. In the U.S., expectations that Congress passes another stimulus package continue to build, while the Fed is unlikely to take major intermeeting action right now. Major policy has provided remarkable economic support, but more is likely needed.
Improving Economic Data Secondary to Health Data
Last week’s Flash Purchasing Managers’ Index readings firmed the belief that global economic activity is rebounding from unpleasant levels. That said, investors are likely to continue to pay little mind to economic data, instead focusing on health data as a reacceleration in virus cases will likely be the most important driver of economic growth in the near-to-intermediate term.
See our latest coronavirus insights.
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