Morning Commentary: P.E.D.

Foreign Exchange - Morning Commentary
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
A lot of market commentary revolves around the belief that a COVID-19 vaccine will be a game changer that quickly pushes the global economy back to full employment.  Certainly there are good reasons for this—widespread distribution of the vaccine would eliminate the need for social distancing, a major headwind to growth, especially in countries that haven’t controlled the virus.  Despite this, there are reasons to believe that an early vaccine might be more of a performance enhancer than a game changer.

It is important to remember that there are a number of hurdles in developing, producing, and distributing a vaccine.  Chief among these are: 
  • Success isn’t binary: Vaccines can be approved even if they only provide protection for half of the people taking them; prevent serious illness rather than prevent infections altogether; provide short immunity; and have prohibitive side effects for some vulnerable groups. 
  • Nationalism: Early in the crisis, there was a scramble for PPE with some efforts to hoard supplies.  This could repeat and compromise the efficiency of production and distribution. 
  • Vaccine acceptance: Even during normal times, many people refused to get a flu shot.  Given the rushed nature of the COVID-19 vaccine development, it is reasonable to assume a slow initial take-up on the vaccine.
It is also critical to note that every recession has started with one or several shocks and continued after these shocks abated.  Unfortunately, there isn’t a compelling reason to think this time will be any different.      

Even under the assumption of a vaccine, social distancing likely does not end immediately although there should be some clear positives as some pent up demand gets released.  In general, the countries that have had the most trouble with the vaccine likely benefit the most, so the US should benefit more than Europe, which in turn benefits more than China.  

However, it is also reasonable to assume that a significant portion of the population will re-engage slowly as they gauge the effectiveness of the vaccine.  As a final ironic twist, the presence of a vaccine might be a headwind itself.  Authorities have flooded the world with stimulus and have very little, if anything, left in their toolbox.  This raises the possibility that they could pull back after a vaccine and let the global economy stubble along on its bump recovery path.
  • US-China headlines remain mixed.  On one side, tensions over tech remain elevated after the US announced additional steps against Huawei.  On the other side, US officials continue to praise China for its progress on the Phase 1 deal.  The planned progress review has been delayed but recent reports indicate that China has stepped up its purchases of farm products.  On balance, the markets continue to skew towards a glass half-full view but flare ups should be more frequent as we get closer to the US elections.  
  • Republicans introduced a scaled back Phase 4 bill.  While no firm dollar amount has been reported, it is lower than the $1 trillion bill proposed earlier.  This is an interesting move as Republicans and Democrats remain deadlocked over the Republican’s higher proposal.  As of this writing, there is no indication that Mitch McConnell will bring back Senators from their recess to vote on it.   
  • House Democrats are expected to vote on $25 billion in additional funding for the Postal Service on Saturday.  
  • US housing data shows that home builders continue to benefit from falling mortgage rates.  For the month of July, housing starts beat estimates as it came in at 0.5 million starts against expectations for 1.2 million starts.  Building permits also beat expectations.  These two data series build on yesterday’s strong National Association of Home Builders market index report that tied the highest level on record.     
  • The UK and EU have started their sixth round of Brexit talks today.  Recent comments out of both sides have been positive but a healthy dose of skepticism is appropriate given the history of the talks.  While the transition period runs through the end of the year, the EU’s top negotiator has set October 2 as the real deadline for talks.  
  • Chrystia Freeland is taking over as Canada’s next Finance Minister after Bill Morneau quit over disagreements with PM Trudeau on stimulus spending.
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