© Reuters. FILE PHOTO: A woman is holding a small bottle labeled "Vaccine COVID-19" and a medical syringe in this picture
By David Randall
NEW YORK (Reuters) – An apparent breakthrough in a coronavirus vaccine weakens the case for another big US stimulus package, but relief is still needed for companies to struggle to bridge the gap for the economy, investors said.
Pfizer Inc (NYSE 🙂 's announcement that the vaccine was more than 90% effective in tests comes because the Senate Republicans and House Democrats are faltering over the health of the economy, and investors are closely monitoring every move in the talks .
Democrats have pushed for a $ 2 trillion package, with support for state and local governments facing steep layoffs, but Senate majority leader Mitch McConnell has pushed back, arguing that Congress should get a smaller coronavirus stimulus package that is heavily targeting the effects of the pandemic.
"In general, you have to assume that the stimulus you would have received is likely to be less as policy makers say the economy will improve," said Jonathan Golub, chief strategist for US equities at Credit Suisse (SIX:).
The vaccine news came after the United States became the first country to exceed 10 million coronavirus cases on Sunday, according to a Reuters tally.
New Jersey joined some other northeastern US states on Monday by reimposing economic restrictions like closing the indoor restaurant at 10 p.m.
Mohamed El-Erian, chief economic advisor to Allianz (DE :), the parent company of PIMCO, warned that incentives were still needed to minimize the economic and social impact of the pandemic. The "tendency is to argue that tax support is no longer needed. That would be wrong," he tweeted.
Talks on another stimulus plan are likely to be influenced by polls for two open seats in the U.S. Senate in Georgia in the January 5 runoff, said Esty Dwek, head of global macro strategy at Natixis Investment Managers, who warned the U.S. economy remains weak.
"Even with a vaccine, we need inspiration," she said, adding that there is a risk that other aid laws might be "a policy, not a need".
LESS DEPENDENT ON STIMULUS
While another stimulus package would likely prolong the market rally, the lack of a bailout will not hurt stocks or investor sentiment as much as it did before Pfizer's news, said Lamar Villere, portfolio manager at Villere & Co.
"The downside risk of what a world looks like in a no-stimulus scenario is frankly less catastrophic to the market than it was yesterday," he said. "We seem to have a blue sky now, if all of this is as positive as it looks."
As investors moved into riskier assets on Monday, stocks hit record highs while the benchmark's 10-year policy rate rose to its highest level since March when the U.S. economy froze under lockdown to prevent the virus from spreading.
Expectations for an upcoming vaccine are likely to drive interest rates higher as investors see an economic upturn over the next year, said Jabaz Mathai, head of US interest rate strategy Citigroup (NYSE 🙂 wrote on a note Monday. "Still, an economic stimulus package would be ideal to build a bridge for the economy."
Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago, said a vaccine has reduced the need for stimulus, but if it's not available to the public until March or April, "we may need something to bridge this."
Markets could continue to rally even if new momentum is set in next year, said Anwiti Bahuguna, director of multi-asset strategy at Columbia Threadneedle. A stimulus package will now likely be somewhere between $ 500 and $ 1 trillion, instead of the $ 2 trillion the Democrats have been pushing for, she added.
"People were right to stay away from certain sectors," such as hotels and travel, she said. The broad rally in the market on Monday "implies that rotation trading is on".