What has happened
Markets consolidated their gains from Monday though risk appetite did slightly falter later in the US session. The US ended down over 1% with the sell-off being broad based given the wide macro-economic impact of the vaccine publication.
Vaccine hopes queried
Health publication STAT announced that some vaccine experts had doubt over the efficacy of Moderna’s vaccine saying that based on the current information released there was no evidence of how impressive the vaccine may be. Whilst the success rate in the trial was very high, the small number of patients involved is a major caveat. Given how important vaccine hopes were to the rally on Monday any injection of doubt was inevitably taken poorly by the market.
EU Recovery Fund
There also appeared to be cracks in the nascent EU Recovery Fund with the French finance minister saying it probably couldn’t be available before the start of 2021. Equally the Austrian Chancellor tweeted that whilst Austria was willing to contribute and back the fund, it was in the form of repayable loans rather than the grants sorely wanted by the Southern bloc. Austria is not alone and is expected to be joined by Denmark, Sweden and the Netherlands (the so called ‘fiscal four’) when it comes down to a vote. An EU recovery fund is still likely but the blend between repayable loans and bailouts/grants is the big question mark. A loan heavy programme is unlikely to be as warmly welcomed by the Southern bloc who are eager for fiscal burden sharing given their weaker economic status.
What does Brooks Macdonald think
Both of the major bull events on Monday attracted a bit of tarnish yesterday. That said both of these were almost inevitable given how early stage the trials were and there were no signs that the ‘fiscal four’ had changed their tone. France is one of the strongest supporters of an EU recovery fund with a large economy that has been significantly impacted by the pandemic. Just to add uncertainty to that, French President Emmanuel Macron lost his parliamentary majority yesterday after a number of his MPs defected. We expect the EU recovery fund saga to continue for the foreseeable future and the eventual agreement to contain a far larger proportion of loans than the programme imagined by France and Germany on Monday.