Coronavirus » Global recovery hinges on vaccine, says Western Union strategist

Global recovery hinges on vaccine, says Western Union strategist

Coronavirus vaccine key to market confidence and economic recovery

A vaccine for coronavirus will determine the pace of the global economic recovery, according to George Vessey, UK currency strategist at Western Union.

Early data from Pfizer and BioNTech showed their vaccine was more than 90 percent effective in preventing COVID-19, while Moderna’s early results found their vaccine was nearly 95 percent effective. The results from both trials caused stock markets to rise sharply, with the FTSE 100 up five percent on the day of the Pfizer vaccine news and the S&P 500 index up 1.2 percent at the close following Moderna’s announcement.

Vessey said market optimism reflects the hope that a vaccine could soon return life to normal and crucially, prevent the need for lockdowns which stifle economic activity. The comments were made at a panel event on November 12 alongside Oxford Economics’ lead UK economist Martin Beck.

“A vaccine is so important because if we continue to live in a world whereby lockdowns are reinstated, suffocating economic activity, then growth prospects will of course be marred as a result. There’s a strong correlation between the lockdown stringency of a country and its economic loss,” Vessey said.

He added that it wasn’t surprising that the UK has been particularly hard-hit in comparison to other European countries as the country’s economy is reliant on the services sector.

“80 percent of UK GDP is made up in the services sector and we know that’s been severely impacted by the pandemic which is why the UK suffered so greatly. Worryingly, we’re already seeing evidence that the economic recovery is slowing, not just in the UK but across the whole of Europe.

“This second lockdown, although it’s not quite as stringent, has forced downward revisions of growth forecasts,” Vessey added, meaning that as long as a vaccine is not available and infections rise, markets will fear further lockdowns in 2021.

The positive vaccine news has therefore reduced uncertainty and means the balance of risk has shifted in a favourable way. Implementing vaccination programmes will lead to significant easing of restrictions on activity, paving the way to a sustained economic recovery. However, successful vaccine production is only half the story, and logistical and distribution uncertainties could temper hopes of a speedy recovery.

Testament to how strong the influence of a vaccine is on financial markets, Vessey said the market reaction on November 9, when Pfizer released its results, saw a surge in the price of oil and equity indices and safe haven assets like government bonds and gold were sold off in favour of higher yielding, riskier assets and currencies. The British Pound rallied against the safe-haven Japanese Yen but weakened against the pro-cyclical Australian Dollar.

“Vaccine successes are seen by many as a game changer for the recovery and that’s why we witnessed financial markets react with such euphoria,” he said. That said, vaccine-related optimism is being weighed against ongoing economic risks – associated with stricter lockdowns, which is why the so-called “optimistic risk rally” has faded already.

 

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