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The Short Squeeze: How a COVID-19 vaccine is dominating economic outlook

Sponsored by IG
·3-min read

An unexpectedly early vaccine is good news for global economic health.

If you want to know what to expect from the financial markets this week, but don’t have time to sift through the news to set yourself up for the trading week ahead, plug in to The Short Squeeze podcast. Hosted by editor of Markets Live on the SMH and The Age, Alex Druce, who is joined by IG market analyst, Kyle Rodda, it fills you in on everything you need to know about the latest in the world of financial markets.

News of the successful production of a COVID-19 vaccine by pharmaceutical company Pfizer and biotechnology company BioNTech last week was much earlier than expected. It surprised – and pleased - market participants, leading them to upgrade the outlook for the global economy.

This week, Kyle and Alex look at what this unexpected but welcome announcement has done for markets across the world:

Record highs

Markets have been celebrating as they begin to see the end of the pandemic potentially come into sight. Global equity funds closed with record highs last week, with the MSCI World Index hitting its highest level since August, and the S&P500 – which is seen as a benchmark for global markets - also finishing trade at a record high. The market as a whole is positioning for stronger economic growth across the board, with stocks in the energy, financial and industrial sectors looking to perform particularly well.

Oil prices

The announcement that a COVID-19 vaccine will probably be available from early next year has bolstered hopes for an increase in energy demand, leading oil prices to spike last week. Energy demand is usually a barometer of the market’s attitude to re-opening, points out Kyle - and during the pandemic it has taken a big hit; it’s thought that oil demand will contract by an average of around 9.8 million barrels a day throughout 2020. The OPEC+’s Joint Ministerial Monitoring Committee is due to meet this week, and is expected to announce an extension of production cuts, which will continue to support oil prices over the next few months.

Too much optimism?

After a few months of sideways trading, the ASX200 is benefiting from the imminent roll-out of the COVID-19 vaccine. After being buoyed by a Biden victory in the US, its lift continued this week, and is set for a 51-jump for the index, resulting in an eight-month high. However, it remains to be seen whether this upwards trajectory will be able to be sustained, notes Kyle. With the RBA minutes due to be released on Tuesday, their approach to the central bank’s Quantitative Easing program could slow the market down again. Add that to COVID-19 cases rapidly rising in the US and Europe, and there’s a concern that Australia is “looking through” the situation, and has priced-in too much optimism to the market. Only time will tell what will happen next.

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The information above does not contain (and should not be construed as containing) personal financial or investment advice or other recommendation, or an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of the above information.