Bottleneck

With the number of global Covid-19 cases still growing, fresh regional clusters and fears of a second wave in winter, the race is on to develop a vaccine. Britain is amongst the front runners with the likes of Oxford University and Imperial College along with major drug companies GlaxoSmithKline and Astra Zeneca.

Having previously dismissed coronavirus, last week President Trump went ahead and put “America first” and announced that the US has stockpiled most of the world’s supply of Remdesivir – the antiviral treatment developed by American company Gilead. The move has sparked global concerns that countries will be less likely to co-operate in cross-border vaccine efforts. Fortunately, the UK currently has sufficient quantities stockpiled to treat all the patients who need it.

However, if a vaccine is developed there might be another hurdle. Apparently, there is a global shortage of small glass vials. According to a contract manufacturer ‘everybody who is making a vaccine wants access to the vials. Where is all the glass going to come from? Medical glass is different from the ordinary glass used for glasses and bottles as it contains chemicals that make it resistant to drastic temperature change and is a more, lengthy production process. Manufacturers are now ramping up production although one of the biggest has recently received an order that is double what they can currently manufacture.

The Covid-19 outbreak and lockdown measures may lead to more companies thinking about the supply of key equipment, components or raw materials and the possible on-shoring of production in a reverse of the outsourcing manufacturing trend from the US, Europe and UK to China seen over the last 20 years. Whether re-onshoring manufacturing by American companies from China to the US to create jobs happens fast enough to help President Trump is questionable.

The World’s Health Organisation has called upon the world’s leaders to work together in a co-ordinated manner to find a solution and make changes to lifestyles to eradicate the virus. Unfortunately, many countries are ‘doing their own thing’ and this has even been noticeable in the UK with the different lockdown exit strategies by region.

What have we been watching?

With the end of the second quarter, investors can move forward to economic recovery from Covid-19 lockdown in the third quarter. However, there is still plenty of debate about whether the graph of global economic showing the collapse in activity in 2020 and bounce back into 2021 is ‘V’,’W’,’U’, ‘L’ shaped or, something that resembles the shape of the  ‘Nike swoosh logo’. The global Covid-19 pandemic is accelerating according to the World Health organisation (WHO) although markets have been supported by some positive vaccine development trial news from Pfizer in the US and from China, strong US jobs data as well as encouraging European manufacturing activity indicators.

The third quarter started with a new record number of Covid-19 cases in the US and many states, particularly in the south and west have had to pause their re-opening processes. Leading US expert in infectious disease, Dr Anthony Fauci, warned of the risk of a greater outbreak if the latest surge is not controlled. US hospitals are reported to be in danger of being overwhelmed. In the UK, Leicester, with a population of about 330,000, became the first city in England to have a ‘localised lockdown’ with non-essential shops to close for 2- weeks. Meanwhile, scientists from the University of Innsbruck tested 80% of the tiny population of Ischgl, the Tyrolean skiing resort described as a possible ‘ground zero’ for Covid-19. Some 43% of residents were found to have developed Covid-19 anti-bodies. More significantly, of those infected, only 15% had experienced any sort of symptoms implying that 85% were asymptomatic.

China officially passed its sweeping, new national security law for Hong Kong. Foreign Secretary Dominic Raab said that the UK government fully intends to see through plans to change visa rules to offer up to 3 million people in Hong Kong a way to acquire UK citizenship. The US House of Representatives agreed unanimously to seek tough sanctions on some Chinese officials. Meanwhile, the US Federal Communications Commission has designated Chinese technology giants Huawei and ZTE as national security threats.

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Brexit talks resume this week with few signs of compromise. Last week’s round of face-to-face talks ended a day early with EU negotiator Michel Barnier saying ‘serious divergences remain’ while his UK counterpart David Frost said there were ‘significant differences’, meaning that both sides are still searching for basic ‘principles underlying an agreement’.

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In the UK, PM Boris Johnson sought to shift the focus from Covid-19 lockdown to recovery with the announcement of a £5bn ‘new deal’ for infrastructure projects and new homes, or spending plans brought forward. Ahead of the press briefing comparisons had been made with former American President Franklin Roosevelt’s ‘New Deal’. This infrastructure stimulus amounted at the time to 40% of US GDP, whereas Boris Johnson’s ‘new deal’ is just 0.2% of UK GDP. Meanwhile, the Bank of England estimates UK households have saved £56bn during enforced lockdown. This suggests a consumer spending boom is possible if there is enough job security. With over 9million workers on   furlough, the key will be how many have a job to return to. Investors will be looking for more stimulus measures from Chancellor Rishi Sunak this Wednesday.

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 In Europe, the manufacturing PMI activity indicator showed a pick-up in activity in June across the region although supply chain constraints remain an issue.

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In the US, Jerome Powell, Chair of the Federal Reserve said that while the second quarter of 2020 is likely to see the largest decline in GDP after the nationwide lockdown that the US ‘has entered an important new phase and has done so sooner than expected’. While the bounce back is welcome, he warned that the surge in Covid-19 cases remains a challenge. The US ISM manufacturing index recorded a big re-bound back into expansion territory in June with the press release projecting a demand-driven expansion cycle. The US saw over 21million job losses in March and April but in June 4.8million jobs were added, well ahead of expectations and following 2.5million added in May.

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The Bank of Japan’s June ‘Tankan’ survey of 10,000 manufacturers revealed business confidence at the lowest level since mid-2009.

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China’s factory activity picked up further in June with the PMI activity indicator in expansion territory with a reading of 50.9 while the non-manufacturing PMI activity indicator came in at 54.4.

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Brent oil edged up above $43 as positive US jobs and European manufacturing data offset the Covid-19 news.

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Finally, Lloyds of London has estimated that global insurers will pay out $100bn this year due to Covid-19, including for cancelled sports, music and industry events. Wimbledon and the World Athletics organisations have already said that they might not be able to get event cancellation insurance next year.

 

Read Last Week’s Alpha Bites – Turning the Screw

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.