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The fate of financial markets remains faithfully interwoven with the developments of the virus. Indeed last week we saw a ramp up of the vaccination rate in Europe, with Germany doubling its rate of vaccination to over 720,000 vaccines daily, leading to a more bullish stance in the region. The Euro in particular rallied, reversing its recent slide on more optimism, while over in the US, with over 20% of the population fully vaccinated, the S&P keeps on breaking all time high records.
Several European nations remain bogged down with lockdown restrictions due to the third wave of infections which remain putting excessive pressure on healthcare systems due to the relatively small proportion of fully vaccinated people in the region. Despite this, optimism has been growing in Europe after the EU has pulled out all the stops to boost vaccine rollout.
Creating new capacity isn't an easy task and the EU has been criticised for the sluggish pace of Covid-19 vaccine across the 27-nation bloc. So far around 47% of people in the UK, and 33% in the US received at least one jab, compared to around 15% for the EU as a whole. Malta’s current rate is of over 37%.
The EU has been hit by a massive shortfall in deliveries ever since the first shots were delivered at the end of last year, exacerbated by the issues surrounding the AstraZeneca vaccine. The EU’s target remains to vaccinate 70% of the adult population by the end of summer. Ceteris paribus, should the region achieve that target, the restrictions and consequences surrounding them would have eased considerably and we should be well on our way to a good economic bounce.
With the gradually increasing levels of vaccination rates, the focus will shift from the average number of daily infections to the hospitalisation rates and actual death rates, essentially rendering Covid-19 largely equivalent to the seasonal influenza.
Indeed the death rate per capita has been declining, as an increasing proportion of the vulnerable section of populations have been inoculated. This is so despite the recent surge in daily new confirmed cases.
Given that the light at the end of tunnel is growing brighter, markets have calmed somewhat, with the Volatility index (VIX) dropping into the teens for the first time since the beginning of the pandemic. Equity markets have kept pushing higher, with the Nasdaq posting remarkable gains in the past two weeks after its recent rotation induced correction. Mega cap tech stocks have been doing particularly well, with household names such as Apple and Google posting significant gains.
This has occurred on the back of a levelling out of 10-year US treasury yields, as well as consistent positive net flows into the markets. Market participants remain being egged on to take on more risk by policymakers, pushing risk assets into record levels. This includes high yield bonds which are now yielding sub-4%.
Tail risk in the marketplace remains as the virus remains unpredictable, with already several reported strains. Most recently a new more aggressive strain was detected in India, which has been attributed to the recent surge in cases.
Fundamentally I don’t think that market participants will be overly alarmed unless current vaccines are rendered ineffective and/or their formula cannot be quickly tweaked to neutralise the threat of new strains. Despite the market currently discounting this possibility, this risk remains but is currently outweighed by the favourable bull market conditions created by policymakers.
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