15 September 2020
The eyes of the world focus on vaccine trials
The progress of vaccines or other treatments for COVID-19 is playing a big role in investor confidence, as the world’s economic recovery depends, by and large, on how quickly a cure can be developed.
This sentiment was especially evident this week, when investors were disconcerted by the pausing of one of the most promising vaccines under development. The joint effort between AstraZeneca and the University of Oxford halted trials after one of its participants fell ill. Although common in this stage of the vaccine-development process, it serves as a reminder of how challenging it is to develop a vaccine at speed. The trial has since resumed.
Positive news for investors
Until a cure is found, markets will remain volatile as they react to good or bad news from different countries. India and Latin America are now focal points for the virus, and account for a high proportion of daily deaths.
However, there is some good news for investors, because many countries around the world are recovering well in economic terms – often despite their high case numbers. In the UK, for example, it was reported that the economy expanded by 6.6% in July – heartening news following fears of a second wave.
Meanwhile, across the pond, only a minority of states have reported a rise in cases in the past week. US equities steadied last week after their recent fall, which had been driven by a decline in the share prices of some large technology companies. The fall hasn’t led to a wider sell-off in other markets, and it’s also smaller than the large drop in March, when investors were reacting to COVID-19 fears and the onset of national lockdowns.
A natural correction?
Investors are looking at recent events as a natural correction to the record-breaking growth in the share prices of large technology companies since global stocks declined in March. Those gains have been so large that even after last week’s losses, the S&P 500 index of large US companies is over 3.4% higher than at the start of the year.
Perhaps stock market investors felt they were overdue another decline, because the drop in spring this year, while severe, was very short-lived. The drop in the S&P 500 in February and March was technically a bear market, but from peak to trough lasted only 33 calendar days and 23 trading days. That’s the shortest bear market ever.
Polina Kurdyavko of BlueBay Asset Management, Co-manager of the Strategic Income fund for St. James’s Place, notes:
“About 25% of the emerging market countries that we invest in will report positive GDP growth this year – which is quite stark compared to the GDP numbers presented in the developed world.”
She adds that China is leading the pack with its COVID-19 response:
“China is the only country which has had a stellar response, in terms of the shape of the economic recovery as well as dealing with the pandemic.”
Bank support still key
With support from governments and central banks keeping markets steady throughout the pandemic, any news from these intuitions is especially important for investors at the moment. Last week, the European Central Bank (ECB) announced that it will hold interest rates where they are for now, adding that there won’t be any additional stimulus in the short term. Christine Lagarde, Head of the ECB, nodded to the fact that the Euro has grown stronger in recent months, and to concerns that its strength might hamper the continent’s recovery. Meanwhile, investors will keep a keen eye on the US central bank, the Federal Reserve, when it meets again this week.
Brexit divorce tension
On more negative note in European relations, Brexit negotiations between the UK and the EU have become even more strained. Last week, the UK government revealed plans to override parts of its existing treaty with the EU (the Withdrawal Agreement), which among other things concerns customs regulations between Northern Ireland and the Republic of Ireland.
Because it bypasses the existing agreement, the planned move (the Internal Market Bill) has been criticised heavily for breaking international law. It has also prompted a sharp response from Brussels, which threatened legal action unless the Prime Minister makes changes to the proposal. The value of the pound fell as investors realised that talks might collapse, but the FTSE-100 index rose, partly because the large companies that make up the index earn much of their revenue in foreign currencies (so stand to gain when the value of sterling drops).
Last night, the Internal Market Bill passed its first hurdle in the Commons, with MPs backing the bill by 340 votes to 263. There is still time to reach an agreement, and last week’s tension could be resolved. But with the lack of a trade agreement already weighing on UK equities, the news increases the chance of the two sides failing to agree a deal.