First the relief, now for a wee dose of reality. Stock markets are looking a little more cautious after yesterday’s massive surge on news that Pfizer (NYSE:PFE) and Biontech have a vaccine that is 90% effective – investors will now show a tad more caution that the kneejerk rally is out of the way. Markets have a habit of overshooting on the way down, and on the way back up. Nevertheless, an effective vaccine changes the game for investors, at the very least in terms of relative valuations and the premium we are willing to pay for growth.
We have a lot more clarity now than a week ago for two big reasons. Joe Biden is all but certain to become the next president of the United States. More importantly, a vaccine is coming. The worst fears - of enduring year after year of masks, of having semi-permanent lockdowns and restrictions on our liberties lasting for ever - should not come to pass. All we need now is a Brexit deal this week as the cherry on the cake. What we in Britain and Europe need more than anything is a confidence injection – and a working vaccine does that. A comprehensive FTA with the EU would help, too.
The FTSE 100 rose over 4.6%, settling just under 6,200. The DAX rose almost 5% and the CAC in Paris was up almost 8%. US stocks opened considerably higher as they took the cue from Europe, but closed less in the green. The Dow rallied 800 points but that was about half the gains at the high of the day, which was a new intra-day peak. The S&P 500 finished up over 1% but also at the lows of the day. In a clear signal of a major rotation from growth to value, the Nasdaq 100 fell over 2%, while the Russell 2000 climbed over 4%. This is a trade that seems to have legs. Due to the makeup of indices and heavy reliance on the big tech names (5 big tech names make up about a quarter of the S&P 500), rotation of this nature may act as a headwind and means it’s not a straight line up. It will be messy as portfolios rebalance and we can expect more outsize moves in some of the most exposed stocks to the vaccine. But, overall, the landscape for equity markets is favourable.
Yesterday we saw some very high volumes in some of the stocks worst affected by the pandemic on the platform. S&P 500 volume leaders included American Airlines (NASDAQ:AAL) (+15%), Pfizer (+7.7%) and Carnival (NYSE:CCL) (+39%). Netflix (-9%) and Zoom (-17%) indicated the degree to which the stay-at-home trade was unwound. On the UK market, there was big volume in Cineworld (+40%), IAG (+25%) Rolls-Royce (+44%), whilst Ocado (LON:OCDO) (-12%) and JustEat (-9%) were offered as part of the rotation.
We do have some uncomfortable questions to answer – does a vaccine on the near horizon preclude more stimulus? Perhaps, a lot depends on the Senate runoffs in Georgia, but the US economy needs a bridge to get to the sunlit uplands of vaccine country. Europe can’t even get its stimulus delivered, whilst in the UK the government continues to offer support to business but does not seem willing to acknowledge the other problems created by lockdowns – a vaccine may give them further excuse to restrict liberties as ‘it will only be for a little longer’. The vaccine won’t stop this from being a very tough winter in Britain, Europe and elsewhere. Data this morning showed the UK unemployment rate in the three months to September rose to 4.8% as the number of people out of work rose by 243,000.
Does a vaccine change the game for the Fed? It ought to, but if experience is anything to go by, the Fed won’t want to rock the boat anytime soon. Several Fed speakers on tap this week will give a clue – expect them to stress the need for fiscal support now as a vaccine won’t available en masse for some months. Overall, the outlook for markets is a lot more positive.
European markets are trading a bit mixed this morning. The FTSE 100 rose above 6,200 while the DAX faded 0.5% to 13,000. Travel stocks rose again on Tuesday, building on some very big gains notched in the previous session. So too did banks – a vaccine will steepen the yield curve which will make a significant difference to banks’ net interest margins. It should also help limit credit impairments.
Treasury yields rose – the US 10-year yield leapt to 0.94%, the highest since March, which sent the 2yr/10yr spread to its widest in almost three years. Gold sank to the bottom of the recent range, testing the Sep lows at $1,850 before catching some bid to recover to around $1,887 this morning. UK 10 year gilt yields also jumped to its highest level in some months at 0.377%. In FX, the vaccine could help risk-on currencies like sterling and the Aussie. GBPUSD advanced to 1.32 and trades with upside momentum in play. Brexit talks this week threaten headline risk but increasingly the market believes that the posturing over fishing rights and level playing fields will give way to the cold, hard reality of securing a deal in time for Christmas.