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Vaccination programmes face new sense of urgency

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  • Cruise operator Carnival reported a preliminary net loss of $2.2bn for the fourth quarter after its sailings were largely suspended during the pandemic

  • Regeneron called for action to help its antibody treatment reach more Covid-19 patients

  • Iran said it hoped to import the Oxford/AstraZeneca jab through third countries and avoid more costly US vaccines

Vaccine makers prepare for game of ‘Covid cat and mouse’

Vaccination programmes have begun and manufacturers are busy churning out the vast amount of doses needed to hasten the end of the pandemic. But what happens when the virus mutates? Will existing jabs still be appropriate or will drugmakers be sent back to the drawing board?

US pharma correspondent Hannah Kuchler examines how vaccine developers and regulators are gearing up for a game of “Covid cat and mouse”. Jabs that use messenger RNA technology, such as those from BioNTech/Pfizer and Moderna, can be adapted fairly swiftly, but for others the process could be more time consuming.

In the meantime, we report today on a triple shot of good supply-side news. BioNTech/Pfizer announced it would boost supplies of its existing jab by 500m doses, Sanofi said it would consider helping manufacture rivals’ products after delays to its own, and Russia said it had begun trials of a one-shot vaccine — “Sputnik Lite” — that could help meet export demand.

The need for more rapid production of vaccines has been reinforced by the increasing virulence of the virus in Europe and in the US.

US states yesterday reported record-breaking seven-day averages for new infections and deaths, while England’s chief medical officer warned of a “health emergency” and Prime Minister Boris Johnson said the UK was at a “perilous moment” as ministers hinted that lockdown restrictions might need to be intensified. 

More than ever, governments’ ability to bring the virus under control rests on the speed of the vaccination programme rollouts. Our (dynamically updating) chart shows how many jabs have been administered across the world. Some countries have unveiled detailed proposals — the UK’s grand plan unveiled today includes a big jump in the number of vaccination “mega-centres”. Others such as India, which has recorded 10.4m infections and 151,000 deaths and begins its mass vaccination programme on Saturday, have yet to begin in earnest.

Live-updating bar chart showing countries’ progress in adminstering vaccines against coronavirus

Markets

Bank stocks may have received short shrift from investors recently on fears of loan defaults but are now back in favour thanks to positive vaccine news and American political developments, says US financial editor Robert Armstrong. US bank indices have outperformed the wider market by more than 25 percentage points since the BioNTech/Pfizer vaccine announcement, while in Europe, an index tracking bank stocks climbed 30 per cent in November, its best performance since 2009. 

Line chart of US bank sector's price/earnings ratio, as a percentage of the S&P 500's ratio

The exodus of many renters from big US cities is putting a strain on the market in bonds backed by mortgages on apartment blocks. At the same time, many of the remainers are struggling to pay their rent. “As the nation enters a winter with increasing Covid-19 case levels and even greater economic distress . . . it is only a matter of time before both renters and housing providers reach the end of their resources,” said a housing association chief.

FTfm, our fund management section, talks to investment bosses about opportunities and risks in 2021, especially the effect of coronavirus vaccine programmes. One refers to Covid-19 as “the great accelerator” — turbocharging pre-existing themes such as the transition to “green infrastructure”.

Business

CES, the word’s largest electronics show, is taking place virtually for the first time. The products on display are also heavily influenced by pandemic shifts: touchless and voice-based technologies are in abundance alongside kit for the “smart home,” from entertainment gizmos to the latest in electronic bidets.

Canary Wharf, the east London hub of the UK’s financial services industry, is facing an uncertain future with its corporate skyscrapers still largely empty as a result of the pandemic. “They have great big corporate tenants looking to downsize and all these massive towers. I think Canary Wharf will be reinvented because it has to be,” said one office agent.

Chart of % breakdown of Canary Wharf occupants by sector

Irish whiskey-makers are turning their focus away from the pandemic-struck economies of the US and Europe towards Asia, report our colleagues at Nikkei. There is plenty of scope for growth: Irish products made up just 0.04 per cent of total whiskey consumption by volume in the region in 2019, according to Euromonitor.

Global economy

Confirmation that the Democrats now control Congress has given fresh hope to cash-strapped US states hit hard by the pandemic as chances rise of new Federal stimulus. Goldman Sachs reckons on a $750bn package in the first quarter, with $200bn earmarked for municipalities.

Chart of state tax collections for March-Nov 2020, compared with the previous year (%), showing how there have been more losers than winners due to the pandemic

Our Brussels Briefing newsletter highlights the debate around EU finances and the fiscal fallout from the bloc’s emergency pandemic measures. Portugal, which took over the EU presidency at the start of this month, is facing two pressing issues: should the escape clause from normal fiscal rules be extended and is it time to push for deeper reforms?

Chinese inflation rose faster than expected in December, thanks mainly to food prices, raising hopes for the country’s recovery. Core inflation, however, which excludes food and energy prices, remains weak.

Essentials

Too many organisations considered bureaucracy a necessary evil before the pandemic and have delighted at being able to discard old habits and obstacles during the emergency period, says management editor Andrew Hill. He warns however that “streamlined ad hoc solutions may be useful in the heat of a crisis, but care must be taken not to embed poor practice — or “bad hoc”.

Have your say

Dexterhouse comments on the article Distressed debt specialist Howard Marks warns on corporate borrowing burden

The exceptionally low interest rate cost and the need to keep surviving during this unprecedented time means companies are becoming dependent on debt to tide them over. The day of reckoning will come. Either the heavy debt burden will force respective governments to keep interest rates lower and longer, which means kicking the can down the road, or there will be a blood letting as companies fold up rapidly. Either situation is unpalatable. I feel despair for the younger generation: through no fault of their own, they are landed with this mess.

Please share your views with us — email us at covid@ft.com. Thanks

Final thought

Working from home combined with the acceleration of cashless payment during the pandemic means many of us no longer need to carry around that wodge of cash and bulging collection of unused ID/travel/loyalty cards. Is the end in sight for the humble wallet?

Chart showing sales of wallets and coin pouches, by region ($bn)

We would really like to hear from you. Please send your reactions or suggestions to covid@ft.com. Thanks



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Vale chief rejects talk of iron ore supercycle

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Iron ore is not on the cusp of a new supercycle, according to the head of one the world’s biggest mining companies, who expects demand for the steelmaking ingredient to flatten out after a couple of years of the current tightness.

Eduardo Bartolomeo, chief executive of Brazil’s Vale, said the record surge in iron ore prices over the past year was very different to the boom of the early 2000s, which was driven by China’s rapid industrialisation. 

“In the last supercycle we had urbanisation in China. It was a structural change. A shock in demand,” he told the Financial Times. “We are not talking about a huge shock in demand now. I would say it is marginal. It is not a shock.”

But he added that, with big global economies revving up and iron producers running at or near capacity, prices could remain elevated until 2023.

“Although there is strong talk about cuts, production is still going up in China and now you have Europe coming back and the US announcing a huge stimulus package. There are also restrictions on supply,” he said. “This market is going to be tight for a while. At least two years.”

Iron ore has spearheaded a broad-based rally in commodities over the past year, rising more than 150 per cent to a record high above $230 a tonne last week, mainly on the back of strong demand from steel mills in China, before paring gains and hitting $209.35 on Friday.

As China’s steel production continues to expand analysts believe prices can remain around current levels but say the market will be highly volatile.

Iron ore’s turbocharged performance has been a boon for big producers including Vale, which require a price of only about $50 a tonne to break even.

It has fanned talk of a new commodities supercycle — a prolonged period where prices remain above their long-term trend, usually triggered by a structural boost to demand to which supply is slow to respond.

Following a deadly dam disaster two years ago that killed 270 people, mainly company employees and contractors, Vale was forced to curtail production.

Its output fell from a planned 400m tonnes a year to about 300m tonnes in 2019 and 2020, and the company lost its position as the world’s largest iron ore producer to Rio Tinto, which has managed to produce about 330m tonnes in each of the past two years.

Bartolomeo said Vale eventually needed to increase production to 400m tonnes because iron ore was a “high fixed-cost business”. However, he said the company would do so in a “very paced way”, mindful of safety.

Erik Hedborg, analyst at the CRU consultancy, said Vale’s journey to 400m tonnes would take time because it required the “restart of many mines, which will go through several complex licensing processes”.

Over the medium term — from 2025 to 2030 — Bartolomeo said Vale expected diminishing demand for iron ore from China because of increasing use of scrap in electric arc furnaces.

“Everybody talks about the circular economy. Scrap is going to come to China. It has to. We see it diminishing demand for iron ore from China.”

Bartolomeo said there would also be a shift to higher-quality iron ore as the steel industry sought to reduce emissions by moving to less polluting methods of steelmaking such as hydrogen-based production.

“All the roads lead to high-quality iron ore and Vale is very well positioned for that,” he added. 



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US banks could cut 200,000 jobs over next decade, top analyst says

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US banks stand to shed 200,000 jobs, or 10 per cent of employees, over the next decade as they manoeuvre to increase profitability in the face of changing customer behaviour, according to a banking analyst. 

“This will be the biggest reduction in US bank headcount in history,” Wells Fargo analyst Mike Mayo told the Financial Times. If his forecast bears out, this year would mark an inflection point for the US banking sector, where the number of jobs has remained roughly flat at 2m for the past decade.

The jobs most at risk are those in branches and call centres as banks prune their sprawling networks to match the new realities of post-pandemic banking, Mayo’s report found. That is consistent with Department of Labor statistics that predict a 15 per cent decline in bank teller jobs over the next decade.

Historically, lay-offs, particularly for lower-paying jobs, have been a contentious issue for the banking industry, which is often held up by progressive politicians as an example of a wealthy industry prioritising profits over people.

But the threat of technology companies and non-bank lenders chipping away at the business of payments and lending, which have traditionally been dominated by banks, has intensified over the past year, making job cuts necessary, Mayo said.

“Banks must become more productive to remain relevant. And that means more computers and less people,” he said.

Most of the reductions can be achieved through attrition over the next 10 years rather than cuts, reducing the risk of a backlash, Mayo said.

The new research, reported first by the FT, comes on the heels of disappointing jobs data that showed the US economy added just 266,000 jobs last month, sharply missing estimates of 1m. Structural elements of unemployment like accelerated automation that took place during the pandemic could pose stronger than anticipated headwinds to a recovery in the labour, economic officials said following the report. 

Pandemic activity pushed headcount up roughly 2 per cent last year as banks hired staff to meet the sudden demand for labour-intensive mortgages and government-backed small-business loans. But that trend is likely to be reversed in the near-term as lenders refocus on efficiency to compete more effectively with technology companies that increased their share of business during the health crisis. 

Increased competition from unregulated companies such as PayPal and Amazon entering financial services was one of the principal concerns JPMorgan Chase chief executive Jamie Dimon outlined in his annual letter to shareholders last month. 

Mayo estimates that banks currently represent just a third of the overall financing market.

“Digitisation accelerated and that played to the strength of some fintech and other tech providers,” Mayo said. 

Many of the bank branches that were closed during the pandemic will probably stay that way, and even those that remain open are likely to be more lightly staffed as branches become more focused on providing advice than facilitating transactions. A large amount of back-office roles also stand to be automated but those numbers are harder to quantify, the report said. 

Mayo said his team 20 years ago was twice as large and responsible for half as much. Doing more with less was the new norm across the industry.

“If I was giving advice to my kids, I’d say you probably don’t want to go into the financial industry,” Mayo said, adding that technology and customer or client-facing roles are probably the only areas that will see growth. “It’s likely to be a shrinking industry.”



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Inflation wild card unsettles markets

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Regime changes usually take a while to fully register among investors. The big talking point in markets at the moment surrounds the potential return of a more troublesome level of consumer price inflation and what protective action investors should take.

The underlying trend of inflation matters a great deal for financial markets and investor returns. The rise in both equity and bond prices in recent decades has occurred during a long period of subsiding inflation pressure and from recent efforts by central banks to arrest disinflationary shocks since the financial crisis. 

A year after the global economy abruptly shut down, activity is duly picking up speed. The logical outcome has been a surge in readings of inflation and this week, a measure of US core prices recorded its largest annual gain since 1996, running at a pace of 3 per cent*.

Core readings exclude food and energy prices and are deemed a smoother gauge of underlying inflation pressure, a point that many people outside finance find baffling when budgeting the cost of groceries and petrol.

So the significant jump in the core measure, and even accounting for the base effect of the pandemic’s brief deflationary shock a year ago, has understandably generated plenty of noise.

This will remain loud in the months ahead as activity recovers from lockdowns with a hefty tailwind of fiscal stimulus working its way through the broad economy.

But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.

“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.

Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, like inflation-protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.

And history does provide a cautionary note for those moving late to buy expensive inflation protection.

Past inflationary alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.

For such reasons, a number of investors and the US Federal Reserve expect inflationary pressure this year will prove “transitory”. But stacked against deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

The effects of monetary and fiscal stimulus means “inflation may settle into a pace of 2.5 per cent (annualised) and that would be different from the average of 1.5 per cent before the pandemic”, said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “Inflation will be higher. At a dangerous level? No.”

In an environment of firmer growth and moderate inflation pressure, equities will benefit, led by companies that have earnings more influenced by the economic cycle. Investors also will seek companies that have the ability to pass on higher prices to customers in the near term and offset a squeeze on profit margins.

Still, a troublesome period of elevated inflation cannot be easily dismissed. The “transitory” argument could be challenged if economic growth continues to run hot into next year, accompanied by a trend of higher wages from companies finding it hard to attract workers.

Before reaching that point, expected inflation priced into the bond market may well push past the peaks of the past two decades and enter uncharted territory in the US and also for other developed markets in the UK and Europe.

Bond market forecasts of future inflation pressure over the next five to 10 years have already risen sharply in recent months. But the rebound is from a low level and for now, expected inflation is not far beyond the Fed’s long-term target of 2 per cent.

“It is the change in inflation expectations that drives asset returns,” said Nicholas Johnson, portfolio manager of commodities at Pimco. Assessing almost 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.

“Most investors have not experienced a period where inflation surprised to the upside,” added Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets show that in broad terms investors are “not paying much of an inflation premium”.

That can change and the prospect of inflation regime change remains a wild card for investors.

michael.mackenzie@ft.com

*The value of core inflation has been changed since first publication.



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