Despite positive vaccine-related undertone, Trump’s tantrums remain a short-term risk

Markets to remain supported by more positive vaccine news to come
Although the positive report of high efficacy of Moderna’s Covid vaccine in trial tests did not have nearly the same impact on shares of pandemic-hit cyclical names as the Pfizer/BioNTech announcement a week earlier, investors seem to have continued with their purchases of these stocks as well as smaller cap names. Indeed, cash inflows into US equity ETFs and mutual funds are hitting near-record highs in November and with over $4.3trn of funds still parked in US money markets, downside risks to equities from resurging Covid infections and renewed movement restrictions look to remain fairly limited given the upcoming vaccines. 

News of preliminary findings that AstraZeneca/University of Oxford’s vaccine seems to have notably triggered an immune response among the vulnerable elderly was also encouraging with its trial results expected to be released over the next few weeks. With US FDA and European Medicine Agency looking highly likely to approve the emergency use of some or all of these early vaccines that have passed the initial safety and efficacy hurdles by 10th of December, besides the caveat which we explored below, we expect the markets to be generally well supported despite raging infection rates across developed nations. 

With many other phase 3 vaccine trial results expected by early part of next year such as those from Johnson & Johnson, Novavax and those developed in China by Sinovac, China National Biotec, CanSino Biologics, not to mention, over 200 others at an earlier stage of their trial phases, the human advancement of medical science, now fully mobilised for a major cause, is clearly flexing its muscles. Once the last trial hurdles are cleared, challenges are in producing enough capacity and establishing the logistics and cold chains to allow these vaccines to reach everyone globally. What seems almost certain to us is that key segments of population within richer nations will have ample supplies within the first quarter of 2021 and that’s what markets care most about. 

Trump’s wrecking ball policies remain a key short-term risk 
In in our weekly publications from late June of this year, one of which we have highlighted in the link below, we began warning investors that with Mr Trump looking notably behind in the polls in the run-up to the US presidential election, the US administration could all but abandon its effort in regaining public support by dropping fiscal stimulus plans and potentially resorting to more hostile scorched earth tactics. We were especially concerned about an even more hawkish stance towards China that we thought could spill over to some sort of military conflict in South China Sea. {}

Although what later proved to be very valid hopes for his re-election chances kept the US president from going on such a dangerous path, having now lost the race and chances for reversing the election result in courts looking ever more remote, we think the dangers of US policy missteps over the next two months have clearly re-emerged. The policy of ignoring the rampant spread of the virus which is costing lives aside, from the market’s perspective, one of the more notable moves made most recently is Treasury Department’s request to Federal Reserve in returning unused public funds allocated to the Cares Act for emergency lending facilities back to Congress. 

To be sure, hopes for more fiscal stimulus had all but vanished before the presidential election. However, by unnecessarily removing such a backstop, it could send an entirely different message, that perhaps the so called ‘Fed Put’ at its full extent might no longer be in place at a time when the US central bank characterised the economy as “still-strained and vulnerable”. With soaring stock market levels having been viewed as a key measure of his policy success, one cannot dismiss the possibility of the outgoing president now wanting the market to reverse course and then blaming its downturn on prospects of Biden’s coming presidency. Come what may, we would continue to suggest buying “back to normalcy” stocks in Japan on any notable weakness ahead of changing of the guards at the White House on January 20th.