Westpac: COVID-19 vaccine rollout will be ‘dominant market force’ in 2021
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This month’s positive COVID-19 vaccine results were a “game-changer” for global markets, Westpac says.
In the near term, investors will still need to grapple with two competing forces – the possibility of a successful vaccine rollout against the ongoing global rise in COVID-19 cases.
But the stage is now set for the vaccine scenario to win the day.
“And as we move through 2021 that dynamic will become more apparent,” Westpac chief economist Bill Evans said.
If the vaccine price action in November is anything to go by, that same dynamic may also have a material effect on investor positioning.
Stocks in sectors hamstrung by COVID-19 restrictions (such as travel and commercial property) ripped higher, while those with pandemic tailwinds (most notably online retail) fell sharply.
For his part, Evans assessed the vaccine outlook in connection with the market for US treasuries – historically a key indicator for gold prices.
Prior to the vaccine news, Westpac had forecast the yield on benchmark US 10-year treasuries to trade in a range between 0.65 to 0.75 per cent in 2021.
In context, that’s a historically low level – partly a by-product of ongoing emergency support measures by the US Federal Reserve to buffer the economic impact.
But along with stocks, bond markets also moved sharply in response to the vaccine news as yields rose.
Westpac now expects the US 10-year government bond rate to rise to 1.2 per cent by the end of next year.
Evans said the Fed may still be active with quantitative easing (QE) support measures next year.
However, “the optimism associated with the successful distribution of vaccines through 2021 will be the dominant market force”.
A successful vaccine rollout would also provide the Fed “with some scope to ease back on support”, he said.
On the domestic front, Westpac expects the RBA to also maintain the core of its emergency support measures through the medium term.
Last week’s jobs report turned some heads when it smashed expectations for jobs added (168,000).
However, wage growth remains elusive.
And Evans said the RBA’s commitment to foster strength in the labour market will face challenges next year when loan deferrals are rolled back and JobKeeper expires (in March).
In that context, he doubts the RBA is worried about overshooting on easy policy, despite a number of economic green shoots emerging.
Its primary monetary policy initiative – targeting the 3-year bond rate (currently anchored at 0.1 per cent) – “will not need to be adjusted until mid-2022”, Evans said.