The Light at the End of the Tunnel?

The Light at the End of the Tunnel?

Nearly eleven months after symptoms first emerged in Hubei province China, the Herculean efforts to develop a vaccine against COVID-19 are finally yielding results. A joint US-German project led by the pharmaceutical giant Pfizer pulled ahead of rivals, with clinical trials indicating a 90% effective rate.

The news was delivered with cautious optimism by the Prime Minister and Professor Van-Tam on Monday. Below, we explain the characteristics of the vaccine, the logistical challenges that surround its distribution, potential alternatives from rivals and the market reaction to the good news.

Novel Remedy

Without delving too deep into the technicalities of the vaccine’s production the ground-breaking techniques utilised to develop Pfizer’s vaccine are fascinating.

Traditional vaccines, like the seasonal flu vaccination, work by injecting a weakened dose of a virus into a patient to induce the body’s immune response. By doing so, specific antibodies are produced, enabling the body to fight the infection the next time it is encountered.

However, this vaccine is very different. It uses the virus’ DNA to synthetically produce a portion of the virus’ genetic code in a lab. The genetic sequence is known as messenger RNA (mRNA) and once injected contains instructions that enables a recipient’s own cells to create the antigens that generate an immune response.

The main advantage of the process is speed of production; vaccines can take a long time, as much as 10 years, to develop and produce. mRNA vaccines have shorter production timescales and the shortened pathway is a key advantage when it comes to fighting global pandemics.

Logistical Difficulties

The innovative method behind the vaccine’s success rate, explained above, also poses logistical challenges for its widespread distribution:

  • the Pfizer vaccine must be stored at around minus 75 degrees Celsius.
  • storage capacity for refrigeration at those temperatures is currently beyond the scope of high street pharmacies and GP surgeries.
  • the vaccine cannot be removed from the its sub-zero storage more than four times, creating difficulty for transportation.

To get around these challenges new infrastructure is being considered to facilitate widespread vaccination of the population, starting with the most vulnerable groups. For example, a reusable transport box will be used which enables 5000 doses to remain at the right temperature for 10 days. Additionally, institutions such as university research laboratories may provide a solution for the storage problems, with many possessing the technical capacity required.

More Positive Vaccine News on the Horizon?

Additionally, other firms’ efforts to produce a vaccine are in line to yield results soon. The list includes AstaZeneca, Johnson & Johnson, and Novavax. US biotech company Moderna is also in the running. There are high hopes for Moderna’s vaccine. It follows the same mRNA process, but importantly their dosage only needs to be stored at minus 20 degrees Celsius.

Market Reaction

Unsurprisingly, market participants didn’t hold back. The press release was greeted with unabashed enthusiasm. The graphs below evidence the euphoria which greeted the news, with Graph 1 depicting the daily percentage movements of major equity market indices in the UK, US and Europe. Overall, UK equities were affected most positively, registering a daily rise of 4.7%.

Graph 1: Developed Market equity reaction

Source: Bloomberg, data as of 09/11/2020

Meanwhile, fixed income markets reacted differently, with prices falling. Consequently, sovereign (government) bond yields spiked up after the announcement, as depicted in graph 2 below, which displays the headline bond yields of the US and UK.

The orange line and left-hand Y-axis depicts UK Gilt Yields, while the blue line and right-hand Y-axis represents US Treasury yields. Remember, bond yields move inversely to bond prices, so as demand for bonds (and therefore prices) fall, yields rise.

The US 10-year yield, already experiencing an election driven increase, jumped to 0.92% on the announcement, before reaching 0.96%; its highest level since March. Meanwhile, UK yields demonstrated similar dynamics, jumping to 0.34% from 0.28% immediately following the announcement, before hitting 0.38%. The main takeaway from these moves is bond investors are anticipating better growth. It also signifies inflation expectations have shifted upward, albeit marginally.

Graph 2: Sovereign bond yields react

Source: Bloomberg, data as of 09/11/2020

While the reaction in both bond and equity markets demonstrate a more favourable outlook, commentators concede that it is early days. Right now, economies are once again dealing with heavier restrictions and lock downs, with government support remaining essential to avoid deep economic scarring. Vaccines represent a light to help guide us out of the pandemic tunnel.

Conclusions

Monday’s vaccine represents the first significant breakthrough to find a medical solution for COVID-19, and others will follow.

The market reaction following the news demonstrates how essential a successful remedy will be in engendering market confidence and returning economies a state of normality.

While timescales for full scale vaccination are unclear at present, the news allows us to view a chink of light at the end of the tunnel.

Global Markets