European coronavirus update and its implications

I have been watching the third wave make its way across Europe and reading the European press to get a sense of how bad it is. And it definitely looks like another lost quarter for Europe. I really like how comprehensive the coverage in the coronavirus live stream in Sweden’s Dagens Nyheter daily is. So, let me use their most recent headlines to give you a sense of what’s happening across the continent. Bullet points with translated partial text follow below.

European coronavirus headlines

• Germany closing during Easter: Germany extended corona restrictions until April 18 and urged all residents to stay home for five days during the Easter holidays. The purpose is to try to stop a third wave of infection, according to Chancellor Angela Merkel. It is a very serious situation, she said at a press conference, according to Reuters. In talks that lasted well into the night until Tuesday, Merkel pressured the leaders of the country’s 16 states to lower the infection rates with severe restrictions. The plan to gradually open up the country has now been put on hold.
• Over 25,000 covid dead in the Czech Republic: Up to 200 people a day are reported to have died of covid-19 in the Czech Republic so far in March. In total, more than 25,000 people have now died from the disease since the pandemic broke out – a doubling since the beginning of the year. With 10.7 million inhabitants, the Czech Republic is one of the worst affected countries in the world in terms of the number of deaths per capita, according to Our World in Data. The government introduced stricter restrictions earlier in March to reduce the spread of infection and manage the pressure on healthcare. Shops, restaurants and schools have largely been closed since October last year. Infections are now starting to decline, but restrictions are expected to remain for some time into April.
• Orbán: Hungary cannot open its economy until everyone over 65 has been vaccinated:  Until those over 65 who have registered for vaccination have received their shot, Hungary will not be able to open the economy, Prime Minister Viktor Orban said on Tuesday. At the same time, the country reports the worst death toll for a single day so far, 252 deaths in covid-19. The healthcare system is reported to be on the verge of collapse with many patients on respirators. Hungary passed the Czech Republic on Monday in the highest number of deaths per capita in the world, according to Our World in Data, writes Reuters.
• French hospitals warn of “shock wave” of patients: The French hospitals could face a “never before experienced violent shock” in about three weeks if the country fails to curb the sharp increase in covid-19 cases. This was warned by the chairman of the French hospitals’ union on Tuesday. The epidemic is gaining momentum and the numbers are exploding, said Frederic Valletoux, who is union president and also mayor of Fontainebleau south of Paris, in a television interview. Epidemiologist Arnaud Fontanet, a scientific adviser to the French government, had the same message in another interview. He said that more restrictions must be put in place if the current ones can not reduce the spread of infection.
• The third wave hits Ukraine hard: Ukraine has tightened border controls and demands a negative corona test for entry, announced Health Minister Maksym Stepanov. In the last 24 hours, 333 deaths have been reported, which is a record high for one day, writes Reuters. Ukraine, with 41 million inhabitants, has been hit hard by what has been described as a third wave of infection in recent weeks. Infection rates have been at the highest level since November and several regions have introduced severe restrictions. The British, more contagious variant of the virus has spread rapidly, according to Stepanov. A total of 30,431 people have died as a result of covid-19 in Ukraine.
• Finland keeps restaurants closed: There will be no restaurant or bar visits in Finland until the end of April at the earliest. On Tuesday, the government is expected to propose that restaurants and bars must be closed until April 18 to reduce the spread of the coronavirus. The proposal has broad support in Parliament and is expected to be adopted during the day. Restaurants and bars have been closed for visits for just over two weeks as part of the larger closure, but have been able to offer takeaway food. The restriction runs until March 28, but may now be extended. However, four regions will be excluded because they have a less severe spread of infection. Finland is the country in the Nordic region that has done best during the pandemic so far. But in February, the number of infected people increased and now more people are in need of hospital care due to covid-19 than ever before. Over 800 people have died with covid-19 and over 300 people are receiving hospital care due to the disease.
• Denmark is expected to remove restrictions in May: Most corona restrictions in Denmark will be lifted when all residents over the age of 50 are vaccinated, which is expected to happen in May. That message was given by Prime Minister Mette Frederiksen after a majority of the parties in the Folketing signed a long-term reopening plan. However, it is based on certain assumptions that we can keep the infection down and that we use corona passports, says the Prime Minister…. In concrete terms, this means that from 6 May, Danes are expected to be able to visit restaurants, theaters and cinemas in the same way as before the pandemic. But it requires that you can show a so-called corona passport. At larger events and nightlife, where there is a risk of super-spread, however, restrictions will continue to apply.

My initial thoughts on the European third wave

What’s happening in Europe right now makes for very sobering reading. Country after country in Europe is showing a huge increase in Covid-19 infection rates, with many also showing healthcare system overloads and peak death rates. We can question the policy response – shutting down activity. But, the healthcare system cannot cope with the rising numbers. What else can they do?

Let’s remember that, in Brazil, the young are contracting serious illness due to the P-1 variant that has become dominant there. And that is largely because the healthcare system is so overloaded that moderately unwell are left unattended until their condition worsens. That leads to a much higher excess mortality rate. So, you are forced to shut things down simply to give your healthcare system a break.

What we saw in the UK in their second wave is that shutdowns alone won’t stop the spread, especially now that Covid fatigue has set in. We saw very high transmission rates and R-numbers there during the second wave despite the lockdowns.

Apropos the UK, one reason that R numbers were high is that the B-117 variant first discovered in Kent, England is very infectious. A Norwegian article I read yesterday says it is 2.6 times more likely to cause serious illness (link in Norwegian here). Moreover, as the article puts it, “the British variant is now the dominant virus variant in Norway. At the beginning of March, more than 70 per cent of all people with corona in Norway were infected with the British variant”.

Relevance to the UK, US and Canada

We should assume – and I have confirmed from many different sources in Europe – that the third wave in Europe is because the more infectious British variant is now dominant everywhere on the continent. And I also know that it is spreading very quickly in North America, with both Canada and the US reporting a doubling of percentages every seven days.

The UK has already vaccinated most adults and was the first country to deal with the B-117 variant. I know Prime Minister Johnson is talking about the continental European third wave washing up on British shores. But, I believe there is enough residual immunity and enough vaccination progress in the UK that we won’t see anything near the same conditions there that we see in Europe now. It’s more that the UK’s second wave led to Europe’s third rather than the reverse happening, with the continent’s wave leading to a big third UK wave.

In North America, the US is ahead of Canada in vaccination. And I think this presents a problem for the Canadians. The R-0 of the B117 variant is 1.4 compared to 0.9 for the original strain and the potential for severe illness is more than 2 and a half times greater. In an unvaccinated population like Canada’s, we have to expect European-like conditions soon. The Globe & Mail ran an opinion piece saying that there have only been 5,000 B-117 cases detected in the country and this was good news. I don’t see it that way. I see it as a tip of the iceberg and expect the healthcare system to be overrun.

In the US, the vaccination progress is further advanced than in Canada. But, social distancing has been very lax of late. Moreover, there has been a big drop-off in testing. So, the B-117 variant may be more entrenched and widespread in the US than we know. I continue to believe we will see a fourth wave in the US due to mutant strains (The P-1 Brazilian strain has also been found many times in the US). The question is about how big a wave we get and what the economic impact will be.

Economic and Market Impact

We are seeing a fair bit of plateauing in reflation-related market trades with oil being the most conspicuous. I suspect this is due to jitters related to the setbacks in Europe regarding oil demand. To the degree the US suffers another wave, expect the reflation trade rollback to be more severe and for it to hit global yields, resulting in flattening and a rebalancing away from cyclical and value trades toward tech and more long duration assets. If you have conviction about this wave, now is the time to place those bets before it hits.

This isn’t a crash-up, crash-down outcome. But the third outcome I posited in February when thinking about the blowoff top. At that time, I wrote

We also could have another major wave of coronavirus from the mutant strains that causes bear flattening. Increasingly though, I am discounting this outcome as a tail risk at this point.

I will stick to that view. But it is still a risk.

My View

I think the furore surrounding the Astra Zeneca vaccine is the most interesting regarding how this pandemic is playing out. This is the cheap, easy to store vaccine that, because of those properties, has the best chance of saving the world.

Right now the headlines around Astra Zeneca are dominated by vaccine fears in Europe. But, just today, the President of South Korea got the jab with the Oxford/AZ vaccine.

“I’m willing to get an AstraZeneca vaccine first if that helps reassure people so that they feel safe about participating in the campaign,” Prime Minister Chung Sye-kyun told a meeting on Tuesday.

Astra Zeneca released US trial data showing 79% effectiveness and 100% prevention of severe illness and death. But as I woke up, the headlines on the AZ vaccine were about the National Institutes of Health questioning the data.

Meanwhile, for weeks, there has been a row between the UK and the EU over supplies of this vaccine, with, at one point, the EU blocking export to Australia. The lack of supply of AZ is supposed to be one reason for Europe’s delay in vaccinating. And many overrun central European countries are desperately trying to get any vaccine they can including the Russian and Chinese ones. The US hasn’t even approved it yet and is holding onto its AZ stockpile, though there was an export of 4 million doses to Canada and Mexico.

We are not safe until everyone in the world is safe simply because deadly mutant strains can form in the unvaccinated population. A recent Israeli study showed the Pfizer vaccine was not equally effective against all variants, for example. So this every-nation-for-itself look is distressing. It tells you how cohesion breaks down under stress.

One thing the Israeli study highlighted that makes me pro-vaccine is this:

The researchers found an elevenfold increase in antibody levels for people who had completed vaccine treatment relative to people who had recovered from the virus, and far higher levels than for people who had only received the first vaccine dose, suggesting the full treatment is necessary for a high level of protection.

Conclusion: vaccinate everyone fully as quickly as possible. Full vaccination is leagues more effective at stopping this thing than any other outcome.