Mon, 11/09/2020 – 07:35
Global stocks and S&P futures exploded higher, hitting all time highs, following this morning’s news that a Pfizer covid vaccine is more than 90% effective, which came at a time when stocks were already euphoric in the overnight session following the weekend’s political news that Biden was in.
The result, in a nutshell, was an explosion in small caps, a surge in the Dow, a spike in the S&P and a slump in the Nasdaq (more below).
“This is about the best the news could possibly be for the world and for the United States and for public health,” said William Gruber, Pfizer senior vice president for vaccine clinical research and development. It was better than even the best result he had hoped for, he said.
The news, which conveniently came just days after Biden was declared president elect by the media, sent Emini S&P futures up as much as 4%, last seen up 124 points to 3,634 or up 3.8%…
… and hitting new all time highs, surpassing the early September closing record of 3,568.
… pushing European stocks up 3.9%, led by travel, banks, energy and auto sectors…
… and Dow futures up 5%, or more than 1,400 points, to 29,650…
… the ETF of Russell 2000 ETF small-caps, the RTY, just hit the 7% limit up.
With the Pfizer news unleashing an epic reflation trade, the Nasdaq initially rose but then tumbled on the back of the sharply higher yields which are hitting deflation names such as the FAAMGs…
… triggering an impressive reversal in the S&P/Nasdaq relationship:
“For stocks, this is likely the best of both worlds,” said Joyce Chang, head of global research at JPMorgan Securities. “A GOP senate majority should ensure that Trump’s pro-business policies stay intact. Under Biden, additional tariffs that fueled the trade war are unlikely to materialize.”
Stocks that had struggled due to lock-down/restrictive measures related to the virus soared; cruise operators, airlines, hotels, amusement park/movie theater operators and casinos were among the early session’s top “lock- down” performers.
Airline stocks surged, with the Stoxx 600 Travel & Leisure Index up as much as 7%, the most intraday since May 26, with the index reaching the highest since Match 9; British Airways parent IAG jumped 25%, cruise operator Carnival surged 18%, Ryanair gained 18% and hotel company Accor jumps 12%. U.S. airlines also jumped premarket, with American Airlines up 15% and Delta up 12%.
Catering companies like Sodexo and Compass, travel booking software firm Amadeus also surging, as are airports concession operators like WH Smith, SSP Group and Autogrill. Aerospace stocks are also surging, with Airbus, Safran and Rolls-Royce among the biggest gainers in the industrial goods index, along with airports operators like ADP and Aena.
Bank stocks also jumped in premarket trading: BofA, Citigroup and JPMorgan climbed about 7% while Wells Fargo jumped more than 8%; Morgan Stanley and Goldman Sachs rose more than 5% as the yield curve sharply steepened. Regional banks rallied, too with KeyCorp, Huntington, Regions and Truist rising more than 5%.
Banks had been hard hit this year by pandemic-induced economic woes and low interest rates; the KBW Bank Index (BKX) has tumbled 31% versus an 8.6% gain for the S&P 500. Card stocks gained as well, with Visa and Mastercard adding more than 5%, and American Express and Capital One up more than 8%.
At the same time, stay at home stocks such as Peloton, Netflix and Zoom sank: PTON is down 5.2%, NFLX -3.3% and ZM -5%; Nautilus, Etsy and Wayfair also fell. The news also hammered companies that had boomed amid an insatiable need for Covid-19 tests: QDEL sank 14% as QGEN tumbled 12%; among smaller companies trading on lighter volumer were GNMK -6.1%, FLDM -2.8%.
Looking ahead, Bloomberg notes that there’s precedence for the market’s gains to continue. Since 2000, every time the S&P 500 was higher heading into Election Day, November and December came in green, too. The first years of presidential terms have also been good ones of late. Since 1986, according to Leuthold Group data, they’ve seen average gains of 18.6%.
The news also helped crude oil explode 8% higher…
… while such flight to safety trades as Treasury yields, reversed amid expectations the reflation trade may finally be unleashed should covid be vanquished, and the 10Y yield soared as much as 14bps higher, rising to a session high of 0.9338% before easing back to 0.91%. Supply is also a factor as this week’s Treasury refunding begins with 3-year note sale at 1pm ET and a heavy IG corporate issuance slate is expected.
Others safety trades such as gold and silver, were also hammered, tumbling over 2%.
In FX, the USD was little changed overall, though the underlying bias was negative according to BMO’s Stephen Gallo; in BBDXY terms the currency is down 2.4% in Q4 to-date. Within the FX space, the bulk of the weakness in the USD was shouldered by the currencies of commodity exporters (NZD, AUD, NOK, CAD, IDR and MXN). Risk assets fed off the strength in commodity prices and weaker USD (Hang Seng +1.2%, Stoxx-50 +6.0%), and the rally gained momentum after reports of an effective vaccine circulated.
Elsewhere in FX, the TRY rallied 6.1% vs the USD after leadership changes were announced for Turkey’s MoF and central bank over the weekend. The majority of FX investors probably expect CBRT to tighten its monetary policy stance further to rein in credit growth, although that is clearly at odds with Erdogan’s ideological preference for rate cuts. Despite that sentiment, the yield on the local currency 2-year government debt dropped (probably because financial markets had already been applying the tightening for the central bank). The next scheduled rate decision is on November 19.
Looking ahead, here are some of the week’s key events:
- Brexit trade-deal talks between the U.K. and EU continue in London Monday
- Tuesday is the EU’s target date for triggering tariffs on as much as $4 billion of U.S. goods in retaliation over illegal aid to Boeing Co.
- Alibaba holds its annual Singles’ Day on Wednesday, an online global shopping phenomenon that had $38 billion of sales last year
- ECB President Christine Lagarde, BOE Governor Andrew Bailey and Fed Chair Jerome Powell are among the speakers Thursday at an online ECB Forum entitled “Central Banks in a Shifting World”
- Finance ministers and central bankers from the Group of 20 hold an extraordinary meeting Friday to discuss bolder action to help poor nations struggling to repay their debts.
Aside for the Pfizer covid vaccine, here are some of the other top overnight news from Bloomberg:
- Biden is largely ignoring Trump’s efforts to undermine his victory. The president-elect plans to unveil on Monday his transition team’s coronavirus task force, a step toward fulfilling his central campaign promise: He will make containing the pandemic his first priority
- Republican congressional leaders still wary of crossing President Donald Trump are holding back from acknowledging Democrat Joe Biden’s victory in the 2020 presidential race
- Joe Biden won the presidency promising to bring Americans together. But now his administration is sure to come under pressure from some Democrats to risk exacerbating divisions by investigating and prosecuting Donald Trump
- Germany is seeking to mend transatlantic trade relations and is mulling a more conciliatory approach that would see the European Union delay tariffs set to hit $4 billion of American products as soon as Tuesday, according to a senior official familiar with the government’s thinking
- Unlike Donald Trump, whom Chinese officials had little knowledge of before he took office, Joe Biden is well known in Beijing. But that history is unlikely to quickly repair a relationship between the global powers that has fundamentally changed over the past four years
- France’s economy will take a smaller hit from the new lockdown to contain the spread of Covid-19 than it did during the tighter restrictions on activity earlier this year, according to the country’s central bank
- Over the course of the next seven days, the U.K. premier needs to deliver a trade deal with the EU or risk a chaotic and economically damaging rupture, and avoid a rift with U.S. President-elect Joe Biden over the U.K.’s controversial Brexit laws
While it’s already somewhat dated, here is DB’s Jim Reid with a recap of the weekend’s firehose of news:
So barring an extraordinary series of events Joe Biden will be the next President of the US. Not that it matters in the great scheme of things but we’ve been debating whether this was a close election or not. It really depends on how you look at it. In terms of the popular vote, Joe Biden won more votes than any candidate in history and will likely win by the second most decisive result since 2000. He leads by 3pp currently with this likely to grow in the coming days, with Nate Silver predicting 4.3pp over the weekend. However in the end the election could have been tied at 269 (and a Congress likely to be weighted towards anointing Trump) without a combined c.55,000 votes in Arizona, Wisconsin and Georgia. It’s largely irrelevant but interesting nevertheless.
Attention will still remain on the remaining Senate races. The Democrats have gained a net of one seat so far, and it looks likely that a pair of run-off elections in Georgia on January 5th will determine which party controls the Senate over the next two years. The most likely outcome though is a divided government as the Dems would need to win both against current expectations.
The market last week stuck to the normal script post a close election where the market rallies regardless of who wins rather than one where micro analysis of post election policies are used to predict what happens next. Who needs us analysts?
The S&P 500 rallied +7.32% last week (-0.03% Friday), while the VIX fell -13.2pts to 24.9, its lowest level since August. It was the S&P’s best week since early April when the index was coming back from the pandemic lows. Indeed it was the best post election 2-day performance since 1900 according to DB’s Binky Chadha.
Binky also noted that going into the election, near term implied vol across asset classes had risen sharply and vol curves were steeply inverted. As the election unfolded in a largely orderly fashion, vol collapsed, with vol curves now significantly flatter across the board. The drop in implied vol has been entirely driven by a fall in risk premiums, with realised vol in fact rising. The equity vol premium is now in the middle of its historical range, according to Binky suggesting the unwinding of protection positions is done.
However, the bounce in the S&P 500 took it only to the top of the range it has been in since August so you could argue we’ve just returned back to where we were before election risk premiums started rising. Technology and Biotech stocks outperformed last week with the NASDAQ up a greater +9.01% (+0.04% Friday). The positive risk sentiment was seen in Europe as well, as the Stoxx 600 ended the week +7.02% higher (-0.20% Friday) while the FTSE MIB (+9.69%), CAC 40 (+7.98%), and DAX (+7.99%) all gained sharply.
In terms of the economic outlook post election our US economists updated their view on Friday. Since Election Day, Senate Majority Leader McConnell has sounded more open to a stimulus deal. This shift in tone increases the chances for a lame duck package and could hint at the potential for a somewhat larger stimulus deal than they originally thought without a “Blue Wave”. So they keep their current baseline assumption of a roughly $750bn fiscal package legislated by Q1 even though they previously worried about this in a split government scenario.
Although the pace of the economic recovery entering Q4 has exceeded their prior expectations, worsening covid trends continue to be a source of downside risk in the coming months. Balancing out these risks, they have upgraded their Q4 real GDP growth projection by 120bps to 2.3% (annualised). This is mainly due to a 170bps upward revision to consumer spending, which we now see expanding by 1.6% in the current quarter. The upshot is that 2020 growth has been revised up by 30bps to -2.9% on a Q4/Q4 basis. They have not made any material changes to their 2021 and 2022 growth projections. However, given the importance of the Senate outcome, they plan to reassess their view pending the results of those elections in early January. See their note here for more.
Asian markets have started the week on a front foot with the Nikkei (+2.41%), Hang Seng ( +1.77%), Shanghai Comp (+1.95% ) and Kospi ( +1.41%) all advancing. Futures on the S&P 500 and Nasdaq are also up as much as +1.70% and +2.60% respectively on the news of a Biden Presidency. In FX, the onshore Chinese yuan is up +0.54% to 6.5771. The Turkish lira is also up +1.56% this morning after a new central bank chief was appointed over the weekend and the subsequent resignation of the country’s finance and treasury minister, Berat Albayrak. Elsewhere, crude oil prices are up c. +2.50% while spot gold prices are up +0.70%. In terms of weekend data releases, we saw China’s October exports at 11.4% yoy (vs. 9.2% yoy expected), the highest growth since March 2019 while, imports stood at +4.7% yoy (vs. +8.6% yoy expected).
Onto the latest on the virus and the US reported another 102,342 cases over the past 24 hours, marking the 5th continuous day over 100k. The state of Utah is now facing an overcrowding of hospitals and has declared a state of emergency and ordered a mask mandate. The state has also ordered 2-week restrictions on casual social gatherings and extracurricular activities. Meanwhile in Oklahoma, more than 90% of ICU beds are now occupied and the state’s health commissioner has asked residents to wear masks and observe other precautions. President Elect Joe Biden will speak later today on his plan to “beat Covid 19,” under which he is expected to appoint a 12-member coronavirus task force. In Europe, Italy reported over 30k for the 5th consecutive day yesterday. For more on how the virus is spreading see the table below.
Maybe as US election noise begins to fade we’ll return back to the virus and to what promises to be a crucial week for Brexit trade negotiations although one can be accused of crying wolf so many times before on this sort of statement that markets won’t really pay it too much attention. However to ratify any deal across Europe before December 31st, mid-November has often been cited as the last point where a deal can be struck. Deadlines have been extended before but the next week takes us to that point. A call between PM Johnson and the EU’s Ursula von der Leyen on Saturday suggested progress had been made but that there were still issues around the level playing field and fishing. The PM noting “significant differences” remain and von der Leyen suggesting “large differences”. Talks will continue this week.
On the data front, this week is a quieter one, with the highlights including the US CPI reading for October on Thursday, along with the preliminary consumer sentiment index from the University of Michigan for November. The UK will also be releasing its Q3 GDP reading, although for Q4 the Bank of England is now predicting another contraction with England now experiencing a second lockdown.
Finally, earnings season is winding down now, with 438 of the S&P 500 companies having now reported. We will only see a further 16 S&P 500 companies report this week, along with a further 65 from the STOXX 600. In terms of the highlights, today we’ll hear from McDonald’s, before tomorrow sees reports from Adidas and Deutsche Post. Then on Wednesday we’ll hear from Air Products and Continental, before Thursday sees reports from Walt Disney, Cisco Systems, Siemens, Deutsche Telekom, Merck, Applied Materials, Tencent and Nissan Motor.
Though the main central bank decisions are now out of the way, there’ll be a number of speakers over the week ahead, particularly given an ECB forum on central banking this week. The expected highlight will be a policy panel on Thursday featuring ECB President Lagarde, Federal Reserve Chair Powell and Bank of England Governor Bailey, so that’ll definitely be one to keep an eye on, not least given the potential for further stimulus as coronavirus cases continue to rise on both sides of the Atlantic.
Looking back at more of last week now, with the Senate looking likely to remain with the Republicans at this point, markets viewed a divided government as bullish for Treasuries. US 10yr Treasury yields fell -5.5bps (+5.6bps Friday) to finish the week at 0.819%. In Europe core sovereign debt went the other way and the risk on dominated rather than the micro of US fiscal policy as 10yr Gilt yields rose +1.2bps (+4.0bps Friday) to 0.27%, while 10yr Bund yields were up +0.6bps (+1.6bps Friday) to -0.62%. Peripheral sovereign debt spreads to bunds tightened as risk sentiment rose. Italian (-12.5bps), Spanish (-4.4bps), Portuguese (-3.1bps) and Greek (-14.0bps) 10yr bond yields all tightened to bunds. Credit spreads in the US and Europe also tightened on the week, particularly high yield debt. US HY cash spreads were -56bps tighter, while Europe HY cash spreads tightened -40bps. IG US cash spreads were -9bps tighter and -3bps in Europe.
The US dollar also reacted to the election news as the greenback fell -1.92% (-0.32% Friday) on the week, the largest one week fall since late March and is now at its lowest level since late August. This drop in the dollar supported commodity prices as WTI (+3.77%) and Brent crude (+5.31%) rose sharply. Metals also gained with a +3.49% rise in copper prices and gold gaining +3.86%, its best week in just over three months. Bitcoin was interestingly up +14.03% (+2.03% Friday)
In terms of data released on Friday, US payrolls were the big highlight. The US labour market unexpectedly strengthened last month, having added +638k jobs (vs 580k expected) which dropped the unemployment rate to 6.9% (vs 7.6% expected). Underneath the headline numbers there were some worrying trends, as the number of long-term unemployed (jobless for 27 weeks or more) increased by 1.15 million to 3.56 million, the highest level since early 2014. In Europe, German industrial production came in under expectations at +1.6% (vs. +2.5 expected), though this was an improvement from last month’s revised +0.5% gain. Italian retail sales for September fell less than expected at -0.8% (vs -1.5% expected), but this was a sharp reduction from last month’s +8.2%.
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Author: Tyler Durden