Vaccine,riskonandlongtail

Dow Jones ended up close to 3% in trading yesterday. At one time before the trading started the Dow futures were showing a 6% gap up opening. The US 10-year bond yield is 0.92, its highest level since mid-June. The spread between the 2 year and 10-year treasury notes rose to 77 bps. The dollar index is 92.70. The emerging market currencies like the South African ZAR, Mexican Peso, Thai Baht all extended their gains against the US dollar.

So, what brings us to the full blown “risk on” mode. The news by a big US pharma giant about the results of their stage three human trials where they indicated that the success rate of the vaccine is more than 90%. With more trial results coming soon the vaccine will then seek approval from the US FDA for mass distribution. Markets as we know are the discounting machines and don’t want to wait for the final approval if and when it comes. They need to position themselves now.  

Hence it looks like the US election results combined with vaccine success when cooked in the vial of low rates and ample liquidity can produce a heady combination of optimism and euphoria. But wait a minute here, unlike wall street the real street can still face some challenges before the vaccine reaches them. One of its requirements is that such a vaccine needs to be stored at a temperature below -90 degrees Fahrenheit. Any exposure above this temperature over two days can render it ineffective. This means that all the nations which want to get the benefit of the same need to ramp up their cold storage infrastructure quickly.

Apart from the logistical challenges one more word of caution on the account of philosophy is also in order here. Vaccine cures can be generally classified under class of problems which have a negative long tail. The reason being that all the possible side effects of the cure can’t be assessed in a short period and they will reveal themselves in due course of time. Any process to quicken the approval cannot cover the unknown unknown associated with such a cure. That’s why in normal times vaccine trials go on for years before a safe option is approved. The decision makers hence need to take a call with this trade off in mind.

In other news, it looks like the US election results still have some time before it finally gets settled. Republican Senator Mitch McConnell said yesterday that President Trump was well within his rights to look into the charges of election irregularities. On the other hand, markets have already started speculating on the composition of the new cabinet with the role of the treasury secretary being debated extensively.

The Indian Rupee is trading at 74.03 hasn’t really participated in the rally in step with other EM currencies. One possible reason which might weigh on INR can be the rise in crude prices. Brent crude rose close to 9% in the trade yesterday on the back of vaccine news. It is interesting to remember that oil was the first casualty of Corona when the news of the virus first appeared in January.