Calming of nerves

Posted 5 February 2021

After January’s misbehaviour – everything from riotous insurrection at the US Capitol to rebellious share speculation – February began with a more predictable return to normality. The share price of now internationally famous US video game store GameStop has fallen by around 87% ($469 last week to $60 at time of writing). Likewise, frictions within the European Union (EU), caused by frustration in not being able to receive the promised volume of COVID vaccines, also calmed. This composure seems driven by acceptance that while the EU’s rushed procurement process had been suboptimal, it would likely be only a very short-term issue, given how vaccine production is ramping up everywhere and more vaccines are moving closer to being granted their licences.

Beyond the mere calming of last month’s disturbances, there was also genuine uplifting news. An all-around positive review and efficacy assessment in The Lancet medical journal of the highly politicised Russian Sputnik V COVID-19 vaccine was one of them. Not only did it boost the credence of the Oxford/Astra Zeneca vaccine, as they are both based on the same underlying principles, it can also be produced and distributed globally at nearly the same cost and ease as annual flu jabs.

Another positive development was the resolution of Italy’s latest government crisis, with the appointment of former European Central Bank President Mario Draghi to form a new national unity government. The very highly respected Draghi is widely expected to pull off another ‘whatever-it-takes’ course of action for Italy, much in the same way as he did back in 2012 at the height of the euro crisis, which he was credited with resolving (temporarily at least).

In the meantime, the Biden administration is swiftly rebuilding the diplomatic relationships that had fared so badly under his predecessor. More importantly, Biden’s team has hit the ground running  and is executing their strategy to pull the US out of the pandemic at impressive speed, having now administered more than twice as many COVID vaccinations (34 million) than the EU (14.5 million).

Back at home, the UK is finally and squarely on the front foot in fighting the pandemic, with a larger proportion of the population vaccinated than in any other large-population country (with the US second and China for once lagging very far behind). This encouraging improvement in the timeline to recovery afforded Bank of England governor Andrew Bailey a surprisingly optimistic outlook for the UK’s 2021 economic development – although it gave sterling an upward boost that exporters could probably have done without. Cash savers were perhaps less enthusiastic about Bailey’s comments, given his signal for banks to make preparations to administer negative interest rates to depositors’ cash holdings. Despite the very negative experience of eurozone banks with their negative interest rate regime of the past five years, UK banks rallied. This was because Bailey stressed that preparedness was strictly only to be seen as an act of prudent planning, whereas he was actually painting the picture of a happy ending that would more likely raise expectations of interest rate movements in the other direction. For the time being, we agree with the market sentiment – as expressed in the rising share price of banks – that there is a low probability for rates to go negative. At the same time, the Bank’s call for prudency can only be welcomed. After all, last year taught us plenty about the importance of advance disaster planning.

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