MARKETS CELEBRATE COVID VACCINE BUT REALITY SUGGESTS THEY MAY BE OVERDOING IT
This week the market continued to rejoice over mankind’s supposed defeat of Covid-19. The jubilation is understandable but looks a bit overdone. Looking at the journey the market has been on; March, sells off because it expects things to be terrible; then governments and banks step in and maybe things aren’t going to be so terrible, recovers a bit; then a vaccine is announced so maybe things won’t be so bad for so long, recovers more. Now markets are at all-time highs suggesting things are going to be even better than they were before the pandemic started. After a year of really damaging economic disruption, that seems unlikely.
Elsewhere, problems on the high street continue as Top Shop and Burton owner Arcadia looks set to go into administration. Lenders clearly don’t think things are getting better after the vaccine and look set to deny the emergency credit it needs. Unless someone develops a vaccine for Amazon, the sickness affecting high street retailers like Arcadia and Debenhams is probably terminal.
MARKETS: VACCINE RALLY PUSHES EQUITIES TOWARDS BEST MONTH EVER
Optimism about the effectiveness and speed of Covid-19 vaccinations has driven equity markets to new heights. In the US, the S&P 500 hit a new all-time high this week as Joe Biden’s choice of former US Fed chair Janet Yellen as Treasury Secretary met with approval from financial markets. Enthusiasm has not been confined to the US. With only two trading days left in November other global equity markets are on track for their largest ever monthly gains. So far in November, the MSCI Europe index is up 14.5 per cent and the FTSE All Share and MSCI World indices up 14.2 and 12.3 per cent, respectively.
While government bonds have not seen yields change significantly, as many investors are waiting to see if central banks will unleash more market stimulus, other safe haven assets have seen values correct as investors favour more risk. Since news of the first successful trial the price of gold has fallen around 7.5 per cent.
UK: GOVT BORROWING DOUBLES PREVIOUS RECORD
Chancellor Rishi Sunak gave a bleak assessment of the UK’s financial health in this week’s spending review. Government borrowing in 2020/21 has already eclipsed the previous annual record and Sunak’s new estimate puts full year borrowing at £396bn, almost double the previous high. With the economy still in lockdown, the Chancellor’s prediction is that GDP will fall by more than 11 per cent this year. Assuming no further lockdowns and a Brexit deal, the current forecast is for growth to return in 2021 but for GDP to remain around 3 per cent below pre-pandemic levels.
The cost of dealing with the coronavirus has affected the government’s ambitious spending plans announced in March. Despite more money for defence and the NHS, big spending commitments were confined to coronavirus relief and recovery measures. So far only the international aid budget has been cut but with the government under political pressure to reduce spending it is likely that other departmental budgets will be cut in the spring. The government’s commitment not to raise VAT, income tax and national insurance will also come under pressure.
CINEWORLD: VACCINE ARRIVES IN TIME TO STOP CURTAIN COMING DOWN
As well as boosting equity markets, the optimism provided by Covid-19 vaccines has thrown a lifeline to many businesses trying to secure funding to help survive until revenues recover. Earlier this week Cineworld, the world’s largest cinema operator, managed to secure an extra $750m to help it through to next year, as news of successful vaccines have opened the way for it to resume trading. The company closed all its screens in October due to the lack of new film releases and currently does not plan to reopen before May 2021.
Vaccine development has helped many other companies which effectively remain shuttered due to the coronavirus. Carnival and TUI also have hefty debt burdens but have seen their credit default swap rates (the cost of insuring against loan defaults) fall by more than half since the beginning of November. The respite will help out in the short term but the level of debt incurred by these and other companies will remain a concern. Cineworld is carrying around $4.9bn of debt, equivalent to five times pre-tax earnings.