Rabo: “Nothing Lasts Forever”

By Bas van Geffen of Rabobank

Nothing lasts forever

Let’s hope that the vaccine’s effects last longer than the positive mood that resulted from the news that Pfizer’s vaccine appears to be effective. Stocks were down following concerns that the virus spread is accelerating again in the US, after a rise in positive tests and hospitalisations resulted in new restrictions being imposed in cities like New York. The S&P 500 lost 1%, which also infected markets abroad with some pessimism.

Meanwhile, 10y Treasury yields are back down to 0.86%, after surpassing the 0.95% mark before the 11 November holiday. The virus’ concerns were one driver behind this move, but this was likely amplified by the inaction on the fiscal front.  Despite the virus’ resurgence in the United States, the White House and Congress have remained very quiet. In fact, Trump’s administration appears to have largely withdrawn from the stimulus bill talks, with Treasury Secretary Mnuchin leaving it to Senate Majority Leader McConnell to restart the talks with the Democrats, according to sources. This only makes it harder to see a stimulus deal being reached before the end of the year, with both sides of Congress entrenched in their positions and not ready to compromise.

Yet, fiscal stimulus remains “absolutely essential”, as FOMC Chair Powell warned earlier. And indeed, even though the heads of the major three central banks were all cautiously optimistic on the progress towards a vaccine in a panel discussion at the ECB’s annual forum, they warned against exuberance. As Bank of England Governor Bailey noted, this was mainly positive for the medium-term outlook. Powell specifically noted that the FOMC does see the economy continuing on a solid path of recovery, but further spread of the virus in the US is the main risk in the short term: “With the virus now spreading, the next few months could be challenging.”

After the Pfizer/BioNTech alliance released encouraging test results, Moderna may report initial results from its own Phase 3 trials soon. While another promising vaccine candidate could inject new optimism in markets, we continue to point out that it will take some time before these can be released to the public and a critical mass of the population has been inoculated.

UK Gilt yields, like those of Treasury notes, were down substantially yesterday, and the Gilt curve flattened noticeably. In addition to the continued concerns about Covid-19, Brexit remains a big headache for the market. The deadline for talks is currently set at 19 November, when the next EU summit is scheduled to take place. But yesterday afternoon, the BBC reported that EU diplomats were sounding more pessimistic about the negotiations than a few weeks ago: “Two weeks ago it seemed more positive. Now the only thing that is moving is time.” In fact, one diplomat suggested that a no deal might be a better start than a compromise, since this would avoid the countries starting off with a tense relation. However, certainly not everyone agrees with that view. BoE Governor Bailey looks at this very differently: he noted that if the UK and EU fail to agree on the terms for future trade, the impact would be bigger than just the costs of tariffs. It would also result in less cooperation and lower goodwill in solving other problems. Our UK strategist still expects the two sides to reach an agreement, albeit only at the eleventh hour.

And the news that PM Johnson will be losing two of his key allies suggests that Johnson’s position in the final and crucial stretch of these negotiations could be losing strength. Dominic Cummings, his special advisor and architect of the governments’ Brexit policy is said to be leaving before year-end. This followed the announcement earlier this week that Johnson’s Communications Director Lee Cain would step down.

Turning to the energy market, oil prices also saw the effects of the vaccine news fade somewhat. The abovementioned concerns about the economic outlook until such a vaccine is widely available weighed on prices, after the US reported another increase in stockpiles. The IEA added to this with a downbeat forecast, cutting its projections for Q4 global oil demand by 1.2 million barrels per day. That said, the price declines follow a few sharp increases, with the outlook of a virus becoming available still lending support to the medium-term outlook for economic activity.

Finally, the Bank of Mexico surprised a large part of the market, leaving the interest rate at 4.25%. While this is in line with our expectations of no move, our Banxico watcher had noted that it was indeed a flip-of-a-coin call whether they would or wouldn’t. The currency may have supported the case for a rate cut, but a majority preferred to hold the rate at 4.25% owing to the inflation outlook. That said, this decision to hold rates unchanged does not necessarily mean an end to the Bank’s easing cycle; Banxico called it a “pause”, which “provides the necessary room to confirm that the trajectory of inflation converges to the target.”