Following the early 2020 onset of the coronavirus (COVID-19) pandemic, the global population eagerly awaited a vaccine capable of combating the virus. Although developing such products typically takes years, policymakers world-wide committed to rapidly creating a COVID-19 countermeasure. Over the course of the process, the financial markets reacted to approvals, setbacks and expectations posed by a potential coronavirus inoculation.
Impact Of COVID-19 On Growth Projections
Traditional financial theory tells us that savvy capital market participants are forward-looking in their valuation methodologies. Further, successfully quantifying the future growth of any market, economy, or security is a key staple of conventional investing. In this regard, COVID-19 proved to be a primary underpinning of many markets as the virus destroyed global, regional and sectoral growth:
- Estimates from the International Monetary Fund (IMF) projected the global economy to shrink 4.4% for 2020. This represents the worst performance since the Great Depression in the 1930s.
- Figures from the United Nations (UN) suggest that the unemployment rate in developed economies ballooned from 5.2% in February 2020 to 8.5% in April 2020. A majority of economists agreed that the COVID-19 employment recovery will be a prolonged affair.
- The travel, energy production and food service industries were hit especially hard in the wake of global lockdowns. Downturns in airline stocks, crude oil values and restaurant bankruptcies were a few items that illustrated sectoral stresses.
Each of these factors severely damaged the growth prospects of entire economies, regions and sectors, posing unprecedented uncertainties. As a result, many in the markets viewed a COVID-19 vaccine as being one of the only ways that the world could return to a relatively normal state.
If history is any indication, then building a viable COVID-19 inoculation is only a matter of time. So, how will a COVID-19 vaccine impact the markets? Although the implications are somewhat unpredictable, at least the potential for economic and commercial growth will be restored. Thus, a vaccine is widely viewed as being bullish for risk assets such as growth-centric stocks.
Fast Tracking A COVID-19 Vaccine
Beginning in late-March 2020, operation Warp Speed was launched by the U.S. government. From inception, Warp Speed was commissioned with producing and delivering 300 million doses of safe and effective COVID-19 vaccines by January 2021.
In addition to Warp Speed, global efforts to build a coronavirus countermeasure spanned every continent, with China, Russia, India, Australia, Germany and the U.K. all participating. According to the Council for Foreign Relations (CFR), governments, multilateral organisations and private companies invested billions of dollars to develop an effective vaccine by 2021.
Creating a vaccine is no simple task. Traditionally, it takes several years to complete the necessary testing, garner approval and execute the marketing required to successfully launch an adequate product. According to the Centers for Disease Control and Prevention (CDC), the general vaccine development cycle includes the following steps:
- Exploratory stage
- Pre-clinical stage
- Clinical development
- Regulatory review and approval
- Quality control
One of the most important steps of the vaccine development process is the clinical trial stage. Typically, clinicals are a three-stage process in which trials are conducted on actual people. Following successful clinical trials, the product may then be approved by the appropriate regulatory body. In the U.S., granting regulatory approval is administered by the U.S. Food and Drug Administration (FDA).
As the COVID-19 contagion swept the globe, governments and medical regulators sought ways to speed up the vaccine creation process. In an attempt to foster rapid progress, the FDA granted "fast track" status to several promising products. On 13 July 2020, the FDA announced that Pfizer and Biopharmaceutical New Technologies (BioNTech) earned the fast track designation for two COVID-19 vaccines. The market impact on 13 July 2020 was immediate:
- Following an early-session rally to pre-COVID-19 levels, heavy bearish volatility hit the DJIA, S&P 500 and NASDAQ.
- The U.S. dollar (USD) turned in a mixed performance against the majors. Gains in the EUR/USD (+0.41%) were contrasted by losses sustained by the GBP/USD (-0.46%). Safe-haven performance lagged as the USD/CHF traded flat and the USD/JPY (+0.37%) posted a modest rally.
- The FDA's announcement brought bullish participation to both Pfizer and BioNTech stocks, which gapped higher on the 13 July market open.
Note: Past performance is not an indicator of future results.
Any positive news regarding a COVID-19 vaccine proved to be a catalyst for market volatility during the summer and fall of 2020. Although large commitments were made to develop a reliable inoculation, a finite timeline remained a mystery. Despite progress boosting sentiment, economic uncertainty stemming from existing and possible COVID-19 lockdowns periodically hindered the performance of many asset classes.
Clinical Trial Setbacks
Fall 2020 proved to be a pivotal time in the vaccine development process. With political pressure for an effective treatment mounting and an apparent "second wave" of infections coming to pass, several COVID-19 clinical trials were paused. The result was short-term volatility as market participants attempted to price-in the setbacks.
On 13 October 2020, Johnson & Johnson and Eli Lilly ceased clinical trials citing "unexplained illnesses" in multiple subjects. These actions followed U.K. regulators halting a trial of an AstraZeneca vaccine a month earlier.
Common sense suggests that if good news regarding a COVID-19 vaccine boosts the markets, then bad news should hurt sentiment. However, this was not the case for the 13 October 2020 session. Some analysts argued that while certainly not good news, the paused clinical trials indicated that the system was working as intended. Public health and legal expert Lawrence Gostin at Johns Hopkins University stated that the pause was "an indication that the system is working as it was designed to work to protect human subjects in clinical trials."
Ultimately, the abundance of caution did little to hamper stock market performance.
- For the 13 October 2020 session, the DJIA (+251), S&P 500 (+57) and NASDAQ (+296) all posted solid gains.
- Conversely, December 2020 gold futures lost extensive marketshare, plunging US$34.40 per ounce (or 1.78%).
- The USD proved to be a beneficiary of the action, as the EUR/USD (-0.59%) and GBP/USD (-1.01%) posted steep intraday bearish trends.
Even though new questions over a vaccine's timeline took precedent, the positive performance of risk assets indicated that the markets were encouraged by the developmental progress.
Historical Perspective: H1N1 Swine Flu Vaccine
In 2009, the H1N1 swine flu prompted analysts to project a major economic downturn if the virus exploded as a global pandemic. While the COVID-19 contagion is extremely unique, the 2009 H1N1 vaccine release serves as a modern comparison.
During October 2009, an initial H1N1 vaccine was introduced to the public. Shortages and disinformation hampered the rollout, which undermined public opinion and the vaccine's overall effectiveness.
The impact of the H1N1 inoculation proved to be negligible on the financial markets. At the time, the world's capital markets were very much in the depths of the Global Financial Crisis of 2008. Despite the treatment being viewed as good news, equities remained depressed, safe-havens rallied and the USD held firm against the forex majors.
How Will A COVID-19 Vaccine Impact The Markets?
At any given time, myriad factors are capable of influencing the financial markets. For 2020, monetary policy, fiscal policy, political uncertainty and COVID-19 were definitive underpinnings. Moving forward, it is difficult to argue that the creation of a robust COVID-19 vaccine will be viewed as anything but positive for the restoration of global economic health.
So, will a COVID-19 vaccine be received in the same fashion as H1N1 by the markets? Not likely. A COVID-19 countermeasure will reduce lockdowns, encourage international investiture and boost economic growth. Each of these events should seemingly have profound market impacts, stimulating bullish and bearish volatility in asset classes across the board.
Ultimately, the rollout of the COVID-19 vaccine is going to be a key factor in how the financial markets interpret it as a driver of value. If the treatment is effective and readily available, then lockdowns and quarantines will quickly become things of the past. Accordingly, economic activity will be enhanced, promoting growth and incremental rollbacks of recovery-oriented policies (quantitative easing, stimulus). These elements are likely to drive bullish participation to risk assets and promote strength in the world's monetary system.
Conversely, if a COVID-19 countermeasure proves ineffective and hard to find, the contagion is likely to continue restricting global commerce. This scenario poses many challenges to the capital markets as economic growth, foreign investiture and monetary policy decisions will come into question.
As of this writing (October 2020), optimistic medical experts predict that a COVID-19 vaccine will come online by early 2021. After its release to the public, only time will tell if the vaccine's efficacy and availability will calm markets and reinforce long-term economic growth.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…