The world has become hopeful that the end of the global COVID-19 pandemic is near as Pfizer has announced a successful Phase 3 trial for its vaccine.
Despite the complex storage requirements, the vaccine is simple to manufacture and large-scale production is expected to start soon. Global markets clearly had a sigh of relief, resulting in huge moves in equities, fixed income and gold on November the 9th. In currency markets USDJPY bounced from 103.26 to 105.38 levels – a huge swing for a pair with such deep liquidity. The markets were reflecting increased risk appetite with a focus on re-opening or normalization sectors in equity markets, such as airlines, leisure and hospitality. Whilst it may take another 3-6 months for our lives to resemble any normalcy, we can be assured that we have entered the final stage of the pandemic.
Things have started to settle on the remaining Senate seats – Alaska’s Dan Sullivan has won the re-election, ensuring the Republican Party holds 50 seats at this point, versus Democratic Party’s 48 seats. The 2 remaining seats are determined in a runoff in the state of Georgia in January 2021, but the Republican Party is expected to secure majority in the Senate once again. This means Joe Biden is taking office without having much power to implement his policies. He is facing a divided Congress which has historically resulted in weaker GDP growth, government expenditure, employment, as well as equity markets, as opposed to having one-party rule. The uncertainty and gridlock arising from the split government spills over to private markets, forcing companies and individuals to be careful in terms of the spending and investing. GDP growth seen during periods of united government has been 3.9%, versus only 2.4% during divided Congress.
A number of new secular trends have emerged from this pandemic, such as working from home, cooking at home and DIY to name a few. An observation can also be made about the increased savings rate that skyrocketed to 25% in Q1 2020 in the U.S. Savings rate, an important factor from a macroeconomics perspective, as increased savings by the individuals translate into less retail spending. Excess saving was supported by the stimulus and government transfers which are not expected to continue but what’s certain is that those caught swimming naked when the tide went out, won’t make the same mistake again. The projection by Rosenberg Research is that equilibrium long-term savings rate will stabilize at around 9% (up from 7.2%), decreasing consumers’ contribution to GDP growth from 1.9% to 0.9%. Hard to overemphasize the importance of retail in the context of the U.S. GDP growth – around 70% is consumer driven. The excess savings rate also translate into lower efficacy of government stimulus, given the obvious propensity to save we are witnessing.
Equity markets gained 1.04% and 0.98%, measured by S&P500 and Nasdaq100 respectively. Gold futures printed a steep loss of 3.52%, while US Dollar was fairly stable at -0.14%.
Have a great trading week ahead!