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Jubilation over the good news of a vaccine has taken the markets by storm.
Shortly after news broke on Monday that US pharmaceutical manufacturer Pfizer had a breakthrough for the COVID-19 vaccine that appeared 90% effective, the Dow Jones industry average jumped more than 1,500 points, an increase of more than 4%. The Toronto market also takes off.
Canadian oil and gas stocks rose with the prospect of people getting back into cars for road trips and everyone in the world getting seats on planes. The price of oil has risen by 10%.
But of course the euphoria wasn’t universal. As airlines skyrocketed and cruise lines sailed, companies like Zoom that took advantage of the restrictions – in anticipation that work from home would continue for years – were hit by the news.
Precious metals, seen as a refuge in a period of economic uncertainty, also suffered a severe blow.
“There is some belief that this will be an engine for economic growth when we get out of the pandemic situation, so it’s good news for the world, but bad news for gold,” independent analyst Ross told Reuters. Norman as gold slipped two per cent on Pfizer news.
Good bad news for interest rates
But there is another group for which good news is often bad news: borrowers.
As Canadian mortgage holders and potential homebuyers have noticed over the past decade, the bad news has been good for interest rates. The good news has the opposite effect.
Central bankers around the world, including Bank of Canada Governor Tiff Macklem, have cut rates to what the US Federal Reserve calls “the effective lower bound” – in other words, as close to zero as possible – to help. the economy to fight against COVID -19 crisis and blockade.
“Monetary policy cannot provide a vaccine,” Macklem said at a virtual press conference in late October. “But it can support the economy for the duration of this pandemic and, once we have a vaccine, get the economy back to its full potential.”
But what if the pandemic is shorter? While Macklem said they were there optimistic scenarios in which a vaccine would arrive and be widely distributed in 2021, that was not his darkest and most likely scenario, which saw a vaccine two years later, arriving in 2022 and the subsequent economic recovery no earlier than 2023.
WATCH | Infectious disease experts analyze the significance of the Pfizer announcement:
Infectious disease doctors answer questions about the COVID-19 pandemic and what Pfizer’s announcement of its first results from its vaccine means. 6:07
Forget about it
In the United States, Federal Reserve Chairman Jerome Powell also predicted a long wait for the recovery, saying he and his group of advisors would keep rates low even after inflation rose above the target of the two percent of the bank and that the jobs were back.
“We are not planning to raise rates,” Powell said in June. “We’re not even thinking about raising rates.”
But while central bankers may not think about the rate hike, the sudden surge of optimism that the pandemic – which so far has seemed endless – could end in the reasonably near future means that borrowers must at least think about the thought that badgers won’t. stay close to zero forever.
On Monday, The American Prospect, a magazine that claims deep ties to Democrats, suggested that Powell’s predecessor at the Federal Reserve, Janet Yellen, had been considered by President-elect Joe Biden for the job of Treasury Secretary.
From his time at the Fed, as the US economy gradually made its way out of the previous recession, Yellen knows a lot about the difficult task of raising rates after they’ve been cut to the bone. Doomed by President Donald Trump and many market participants for hiking too soon, he is unlikely to want to see Powell blow the gun on lift rates before the recovery begins.
But once in a political role within the Biden administration, he may be inclined to support what will inevitably be a painful and unpopular process, if need be, of raising rates in time for the economy to adjust before Biden or the his successor return to the polls. .
The euphoria of the market subsided
As several financial commentators have noted, the market’s explosion of euphoria over vaccine news may be overstated. Certainly, the peak at the opening of the US and Canadian markets eased after cooler heads prevailed.
WATCH | Vaccine prospect boosts the stock market:
Equity markets rallied in part on Monday due to news about the Pfizer vaccine. But not all of them. Winners and losers reveal that investors are betting on a return to normal. 1:31
When it comes to vaccines, there are a lot of mistakes between the cup and the lip. The tests are far from over. Distribution of a vaccine that requires low temperature storage can lead to complications. And even if all goes well, there are no prospects that it will stop the current spate of infections caused by everyone heading indoors for the winter or getting too close to Christmas.
But the good news that a vaccine appears to be within reach – and with it, a return to a normal life and healthy economy – is a timely reminder that bad news, and the historically low interest rates it offers, can’t. don’t last forever.
This It may also be a good time for Canadians to consider what a victory over COVID-19 will mean for the tariffs they will have to pay.
Follow Don on Twitter @don_pittis
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