Last week was a bad one for the markets with the S&P 500 down 3%, the NASDAQ falling 5% and although the FTSE managed a small increase that rise owed much to a big fall in the pound. Indeed, in sterling terms the European and Asian markets had a good week.
Deadlock on US fiscal measures – Fed to ease further?
In terms of news flow, politicians in Washington seem no nearer to agreeing a fiscal package to replace expired measures – notably the $600 a week Federal payment to the unemployed. And even though the US economy has shown remarkable resilience in the face of the lack of fiscal movement and the second wave of the virus we think that US Federal Reserve (who meet this week) will signal that they stand ready to ease further. And that probably means more asset purchases.
Oxford Vaccine tests resume
The other big news was on the Oxford virus where Phase III testing was paused. This is nothing like as worrying as it sounds – it’s standard procedure when someone who has had the vaccine gets an unexplained serious illness. For a change, the market responded calmly – and we now know that testing has resumed.
The bigger picture is that at least one of the seven vaccines currently undergoing Phase III trials will likely prove successful. We still view the Oxford vaccine as the front runner, and it would also be the best for the markets given that it has been mass produced since April and does not need to be super frozen when stored. Contrast this with Pfizer’s vaccine. The others in progress would generally be slower and/or more difficult to use in any mass vaccination initiative. But those hurdles can be overcome one way or another.
A vaccine is vital for recovery
Vaccines are important because they mean we can beat this virus. So far, the world has been focssed on suppressing it. This has allowed the world economy and corporate profits to stage an impressive recovery but without a vaccine the recovery will be incomplete. When we get a vaccine (and I believe we will) it will allow the world economy and corporate earnings to fully recover by the end of next year.
Perspectives on Brexit
Brexit is back in the headlines thanks to the extraordinary decision of the UK government to state that it is contemplating a breach of the Withdrawal Agreement. This would amount to breaking a treaty freely entered into by the self-same government!
The European negotiators were already doubting whether they could trust Boris Johnson and those fears would appear to have been confirmed. This move has hit sterling just as it was recovering thanks to better data on the UK economy.
We still cling to the hope that we get agreement but the risk of a ‘no deal’ scenario has increased. Mind you, even a deal would be limited with little on financial services, plenty of non-tariff barriers to trade and agreements to be had on health & safety and so forth.
A buying opportunity? I think so.
Last week I said I was still pro risk and expressed a preference for equities over bonds. That stance has not worked well over the last week of so, but I still think it’s the right strategy over the medium term. Why? Because economies are recovering, and an approved vaccine will allow that to continue – when that happens (as we believe it will) recent market falls present a buying opportunity.