Caution seen after bumper November

The end of a pretty cautious week in the markets, despite getting more positive news on the vaccine front as investors take a breather following a pretty fantastic couple of weeks. Moderna followed Pfizer at the start of the week in announcing results from its late-stage trials before the latter provided an update with improved efficacy on the initial findings. This was followed later in the week by Oxford/AstraZeneca providing an update of its own that was extremely encouraging and should precede some excellent results in a few weeks.

But it seems markets heavily priced in these findings after the Pfizer announcement last week, allowing for attention this week to turn to more pressing matters. Most notably the rapid spread of Covid-19 across Europe and the US, with the latter imposing more restrictions as the daily fatality rate closes rapidly in on the March peak.
Now is the time to act and with lawmakers on Capitol Hill having failed to pass a package prior to the election, it looks like the Fed is once again going to be left to do the heavy lifting in the near-term. Even if talks have resumed, the last few months has highlighted the lack of urgency that exists so I’m not hopeful of an agreement any time soon.

The battles are set to continue in Washington over a stimulus package as the country sees record cases and the number of fatalities fast approaches the peak from earlier this year. Restrictions are appearing across the country once more which means the urgency to agree another stimulus package has just ramped up a fair few notches.
A bizarre spat between the Treasury and the Fed is hardly inspiring confidence in the markets at a time when the potential for turmoil is potentially heightened as the second Covid wave tears across the US. Not only is the Fed not in agreement with the Treasury regarding the necessity of those funds to remain in place, it believes they should remain where they are for longer than initially envisaged to enable proper market functioning in these potentially turbulent times.

It’s not just in the US where a battle for cash is happening. Poland and Hungary have set themselves on a collision course with Brussels, vetoing the next seven year budget that was negotiated to include pandemic aid for those countries hit hardest by Covid-19 using funds raised by the European Commission. It was a landmark decision to agree on an aid package of this size raised through a shared debt issuance but, as always with the EU, it’s proved to not be as straight forward as you’d hope.

The decision to veto a budget you ultimately benefit greatly from financially may seem a strange move but as we’ve seen so often in recent years, political and financial motivations are not always aligned and politics can often take precedence. In cutting off their nose to spite their face, they’re hoping the urgency of the pandemic aid will force Brussels to soften its position on rule of law but they may not have the leverage they think. Time will tell, but the longer this goes on, the more uncertainty it creates which may be a drag on European markets.

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