Figure 1: Vaccine Benefits Coming Through
Source: WHO, Datastream
New confirmed COVID cases in the U.S. have now dipped to 19k on a seven day moving average basis, while large EZ countries are also seeing a clear downtrend in cases. In the EZ this partially reflects the restrictions seen over the spring that are now starting to ease, but it also reflects the benefit of the accelerated pace of vaccinations. EU countries have accelerated from 24% to 38% of the total population being vaccinated with at least 1 dose and most EU countries will likely now reach 70% of the adult population by July. In the U.S. the May decline in new COVID cases is impressive, after the plateau in March and April and likely reflects the effects of widespread vaccination on reducing individual infections and also reducing transmissions (studies suggest by ½ to 2/3 for vaccinated people). Finally, Canada has caught up with the U.S.
For economic forecasters this is good news and will likely translate into a further improvement in business and consumer confidence in the next few months, as vaccinations are sustained at a healthy pace. While financial markets are forward looking and have discounted these trends, consumers will likely adjust expectations with a lag and will want to see the reality of their own vaccination and lower COVID cases trends. The surge in U.S. and UK economic activity will likely be echoed in real sector data for Q2 and Q3 in EZ countries, though with different magnitudes as the U.S. sugar rush high is also fueled by the $1.9trn Biden administration COVID relief package. While most DM countries have been exposed to the Kent variant, the Indian variant has been restricted to modest outbreaks apart from the UK where is has become the dominant variant. New UK confirmed cases have ticked higher and need to be watched in the next few weeks, as any persistent surge could impact UK economic confidence. However, data so far suggest that full vaccinated people in the UK are a very small proportion of those that have been hospitalized and hospital beds with COVID patients currently remains very low.
Japan and Australia are lagging behind in the vaccination race and this creates a vulnerability. Australia border policy and zero tolerance approach helps provides some breathing space, but the Kent and Indian variants are more transmissible than the original Wuhan variant that Australia successfully curbed in 2020. Japan faces somewhat greater challenge, as current daily new COVID cases are elevated though off the mid may peak. The next challenge is the July Olympics where 79k officials, support staff and press are scheduled to come from overseas, with a reluctance to postpone the Olympics until 2022. This risks a 5th wave in Japan, given the low vaccination rate and low existing protection from previous infected cases.
From a macro strategy standpoint, this divergence of trend on the margin has tended to be one factor in relative equity performance, with the Japanese equity market lagging this quarter as concerns grow about a delayed recovery. Even so, the situation would need to diverge more noticeably to protect further market divergence, as Japanese equity market current relative weakness reflects a correction after a great 2020 and the BOJ stopping the monthly purchases of ETFs.