On November 9th 2020, pharmaceutical giant Pfizer announced preliminary results of a medical study suggesting the development of a COVID-19 vaccine, with an efficacy of 90% in preventing COVID-19 in candidates facing exposure to the virus for the first time. The study comprised 43,538 participants, with those receiving the active dose being nine times less likely to catch the virus than those given the placebo dose. The announcement marked a significant advance, in conjunction with offerings from Moderna, AstraZeneca, and BioNTech, at combating the coronavirus pandemic. A retrospective examination of the market response to the announcement affords manifold insights into the current market dynamics and their intimate relationship with the development of the coronavirus pandemic. Here, we look at both the macroscopic response of the markets on a global scale, in addition to studying more closely, individual equity sectors.
The overall market response to the announcement was both quick and substantial. The general response discounted stronger growth, lower risk premiums and saw a significant rally in equities that had hitherto suffered the greatest losses of the initial pandemic response throughout 2020. Conversely, equities that had hitherto benefitted from the new way of life — such as the now widespread adoption of remote working and communication — saw the most dramatic underperformance.
First, looking at bond yields, the 10-year developed world bond yields all rallied, with the strongest increase in Australia and the United States both yielding a 0.14% increase at the news — with the YTD yields sitting at -0.61% and -1.11% respectively, corresponding to the hardest hit through 2020. Furthermore, these gains occurred on a day when equities were already up across the market, reflecting a particularly strong market response. A closer look at the different US bond classes shows both the US 10-year nominal bond yield and 10-year real bond yield exhibiting a strong rally following the vaccine announcement. However, here it is important to note that nominal yields (-0.70%) still remain well below pre-crisis levels of around 0%. Most emerging market 5-year bond yields also rose, albeit to a lesser extent, with the largest shift, Malaysia, up by 0.6%.
Global equities rallied across the globe upon the announcement, with the largest movements predominantly in mainland European markets, exhibiting growth of around 6.4% on average across the bloc. UK equities gained around 4.7% and the US around 2.5%. Again, there was a noticeable underperformance in countries that had, up until the announcement, weathered the pandemic crisis well, such as Canada, and countries whose currency is typically considered as a “safe haven”, such as Switzerland, which, out of developed economies, saw the smallest growth of 0.9%. The effect, mentioned throughout this discussion, whereby equities and countries that saw the biggest economic hit following the start of the pandemic typically see the largest boost following the vaccine announcement, is highlighted in Figure 1, where a negative correlation between the YTD performance and equity reaction following the vaccine announcement is shown. With all developed economies sitting above the x-axis, it is concluded that the global response to the news was universally positive.
Commodities – Growth vs Liquidity
This diametric shift, with some assets gaining strongly whilst others fell, was also demonstrated well in commodities. For example, two extreme movers, gold and oil, shifted dramatically in opposite directions. Oil, which YTD had suffered a drop of 43.4%, saw a healthy increase of 7.81% during the market action following the Pfizer vaccine announcement. Conversely, gold, following a particularly strong YTD with a gain of 26.9%, fell by 4.41% following the announcement. This behaviour may not be surprising looking at the two commodities individually. For example, gold, typically considered a safe haven for asset allocation during crises and times of market turbulence, saw a loss in returns as the news of the vaccine potentially corresponds to the end of the crisis being in sight. For oil, the grounding of the majority of domestic and international flights saw demand for the commodity drop. Here, to a first approximation, we ignore the effects of Russian, US and Saudi Arabian political movements that also heavily affected the price of oil around this time. However, with the news of the vaccine sparking hopes of a sooner return to air travel and oil consumption, the commodity price was seen to move accordingly. At an even higher and more general level, ignoring the specific applications of the two commodities, the dynamic following the vaccine announcement is reflective of a growth versus liquidity effect. Throughout the pandemic, commodities that are linked closely to liquidity and discount rates (for example, gold and precious metals) have consistently performed well. Conversely, those linked to global growth (energy being the perfect example) have suffered greatly since March 2020. The announcement saw a stark inversion of this dynamic — commodities linked to liquidity and discount rates suffered, and those linked to global growth rallied.
Equities by sector
A breakdown of the different equity sectors yields a similar story as shown in Figure 3. Again, a clear anticorrelation is observed, with the sectors hit most hard at the outset of the pandemic, such as energy and financials, seeing the largest boost from the vaccine announcement. Conversely, equity sectors such as consumer discretionary and information technology saw a drop in returns as a result of the vaccine announcement, presumably representing the opinion among investors that these sectors are of an increased value during a pandemic. This is likely due to remote working and communication, for example, being intimately linked to the information technology sector returns. Although the correlation observed is the same as that observed for global equities as a whole, unlike the aggregate global equities some specific sectors did indeed respond negatively to the vaccine announcement, losing value on November 9th.
Following the announcement of the Pfizer vaccine in November 2020, we observed a strong market response. Consistently across all asset classes, those that had suffered the most as a result of the coronavirus pandemic rallied considerably, whereas those that had hitherto weathered the pandemic well, or even gained, saw the least significant response. Globally, aggregate equities gained, however, some specific sectors, notably those that have seen strong returns throughout 2020 from the effects of remote working from the pandemic, saw a negative response following the announcement. For now, it appears that the markets still remain intimately and, in some cases possibly emotionally, linked to the coronavirus pandemic.