Gold News

What to Make of Vaccine Volatility?

Even if Pfizer's fails, Covid's end has begun...
MARKETS had a wild ride last Monday, writes John Stepek at MoneyWeek.
And for once, it wasn't to the downside. Oil soared by 10% at one point. Value stocks rocketed. Big Tech stocks wilted. Airlines saw gains of upwards of 20%. Office Reits jumped higher. Bond yields rose (so prices fell).
It was all off the back of the news that we might just be able to rid ourselves of this virus sooner than we'd dared hope. Pfizer and Germany's BioNTech SE announced very encouraging news on their Covid-19 vaccine. And it seems to be very effective.
Now, lots of well-meaning (and not-so-well-meaning) people are falling over themselves to downplay the news, and warn us about all the hoops that have to be jumped through first.
That's fine. We're adults. We know. We're not going to strip our masks off and run about Tesco's embracing random strangers and squeezing the fruit and veg with abandon. (We also discuss the details of the vaccine and the likely timeline in the latest issue of MoneyWeek magazine.)
The point is that we now have concrete evidence that a viable vaccine can indeed be put together in what was at one point viewed as an impossibly short timeframe. We now know that we probably don't have to live with Covid-19. There are loads of other vaccines being tested. If this one doesn't cut it, one of the others will. Most importantly, we now know that politicians will really struggle to justify any further lockdowns much beyond the end of the year, which clears away a massive cloud that was hanging over 2021.
What that means is the markets no longer have to discount a "stop-start" economy where we go in and out of lockdown like some macabre Hokey Cokey. And it was clear from yesterday's turbulence that markets were pricing in a great deal of ongoing disruption.
You can pick out a lot of individual fun details (the Zoom share price falling by more than 15% was highlighted by many with an almost unseemly level of schadenfreude). But the main themes are quite telling.
Interest rates rose. In other words, bond yields went up and bond prices went down. Why? Two reasons. Firstly, no one wants to own boring old bonds if the economy is going to improve. They want to own risky stuff. Secondly, if the economy speeds up, the Federal Reserve (and other central banks) might have to raise interest rates faster than previously expected. I take issue with the second of these – but it's certainly a valid rationale.
Why did precious metals fall?
Meanwhile, value stocks surged while the FANGs (or whatever the current acronym is) actually fell. Why's that? It's partly linked to the interest rate argument. The tech stocks are "long duration" assets – they do well while interest rates are low and growth is weak. So they fell for the same reason bonds fell.
As for value – it's the flip side of growth and tech. What's bad for those stocks is often good for value. Value includes dull industries that generate lots of cash flow today but are assumed to be destined to see weak or non-existent growth for tomorrow (which is not always correct, of course). So many value stocks could be described as "short duration". But also, the value bucket contains all those stocks that were languishing because of Covid lockdowns. Suddenly we might be able to fly again one day. Suddenly we might be able to go on holiday. Suddenly we might eat out. Suddenly we might go back to the office occasionally. All those sorts of stocks did well – and the oil price surge rather epitomises that.
The one thing that might confuse some readers is that precious metals took a hit yesterday, though they're showing signs of stabilising today. Why? As Louis Gave of research group Gavekal points out, "rising yields are a serious headwind for the gold price". However, as Gave continues, what really matters for gold is "real yields". In other words, as long as inflation is rising faster than interest rates, then in the longer run, the precious metals should have further to go.
This is where my earlier point comes in. It makes sense that interest rates rose yesterday, but I can't see central banks allowing them to creep higher to the point where they pose any sort of risk to the economy. And to be clear, they don't have to go very high to get to that point, such is the extent of our debt pile. Central banks (and governments) want inflation to get rid of the debt. That means they have to be relaxed about inflation rising and they also have to do what they can to keep interest rates nailed to the floor.
So I don't think the precious metal bull is over. Just be aware that it'll be a bumpy ride until it becomes apparent that inflation is definitely the goal and that it's achievable.

Launched alongside the UK's highly popular The Week digest of global and national news in 2001, MoneyWeek magazine mixes a concise reading of the latest financial events with expert comment and investment ideas.

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