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Stocks bounce after sell-off, stagflation worries persist
In a word, stagflation. That’s how I’d sum up what this market angst is all about. Or at least, the spectre of stagflation. Simply put, growth is already decelerating and downside risks to the growth outlook are darkening due to rising cases, Delta and other emerging variants, as well as worries about potentially lower vaccine efficacy. At the same time, inflation is shooting higher. Supply side constraints (supply chain tightness, availability of labour/parts) are a problem central bankers cannot solve.
As I detailed on August 12th 2020, the Fed was always going to struggle to get a grip on inflation as it let the economy run hot – AIT was developed before the vaccines had their effect and the Fed has been slow to respond. (US inflation hot, stocks keep higher as bonds slip). “The Fed should and could be relaxed about headline inflation running above 2% for a time, instead prioritising the employment level, but it also means inflation expectations can start to become unanchored as they did in the 1970s […] In a nutshell, if inflation expectations lose their anchors, then we are faced with a stagflationary environment like nothing we have seen for 50 years. High inflation, low growth for years to come is the unwanted child of a global pandemic meeting massive government intervention. And, expounding further on Aug 13th: “The risk is that inflation expectations can start to become unanchored as they did in the 1970s when the Fed had lost credibility, this led to a period of stagflation and was only tamed by Volcker’s aggressive hiking cycle.”
Are we going to see another Volcker? I doubt it very much, I doubt central bankers have the bottle or mandate even (full employment, remember) to engineer a recession to get everything back on an even keel.
Stocks slumped at the start of the week and bonds rallied, sending the US 10yr benchmark to its lowest since February at 1.17%. The S&P 500 declined 1.6%, whilst the Dow Jones industrial average was more than 2% lower for the session, though both closed off the lows of the day. It was the worst single day for the Dow since October, as the major cyclical plays – energy and financials – led the losers. The S&P 500 briefly traded below its 50-day SMA but managed to close above this level, and managed to just hold onto our horizontal support drawn across the May-Jun peaks. The Vix spiked to 25.
As previously noted here, the whole story of the bull run since the vaccine news/Biden win in Nov is littered with ~5% type pullbacks to that 50-day line, before the uptrend is resumed. Could it be different now? Perhaps, but it would be betting against form to suggest so. We’re only about 3% off the recent all-time high and this pullback may not be over until at least that becomes a ~6% drop to about the 4150 area. Cyclicals have been selling off for a while now and the market was being propped up by an ever-narrower base of mega cap tech/growth.
European indices endured a brutal session, with all the major bourses registering declines of more than 2% for the day. The FTSE 100 tumbled through its 100-day moving average, hitting a three-month low. In early trade, stock markets in Europe staged a fightback, but I’d flag the risk that this a) a deceased feline and in any event b) is a market in a summer funk that can cut you up in both directions. UBS boosted sentiment with a net profit of $2bn for the quarter, up 63%. EasyJet shares rose as it signalled it would fly 60% of Q4 2019 capacity in the final quarter.
The FTSE rolled over after failing to sustain the 78.6% retracement above 7,200. Starting to look a tad oversold and we should anticipate a retest of 7,000 but further weakness cannot be ruled out a bears can look to a possible retreat to the 61.8%/23.6% at 6,650, close to the 200-day SMA.
It’s another story of moving averages in FX, with cable dropping below its 200-day line. It’s not traded under the 100-day and 200-day SMAs since Jun 2020. Not a heap of support below and a swift move back to 1.350 cannot be ruled out.
Finally, Bitcoin futures: as I said yesterday the price action was dreadful and shouting out for another leg lower, duly delivered as risk took a beating yesterday (great hedge…). Price action now under $30k and eyeing the Jun low.
Airlines jump on summer roadmap, Tesla sinks as Bitcoin crashes
When companies tie themselves to any one horse it presents risks, even if it’s the most-fancied filly at the post. Thoroughbreds are temperamental creatures and liable to break down when being ridden too hard. So, when Tesla tied its fortunes to Bitcoin with a $1.5bn investment, it was reasonable to expect there could be problems ahead. Yesterday, for various reasons Bitcoin crashed from an all-time high in a brutally swift drop that took prices from near to $58,000 to $47,400. At one point, prices plunged $5,000 in 10 minutes before paring losses and attempting a recovery, which stalled at $55k before turning lower to trade under $49,000 this morning. Musk may have spooked some participants with his tweet saying the price was ‘too high’. But I feel that was an in-joke for followers. More importantly the market was ripe for a sharp technical pullback after a parabolic move, the kind that usually comes down under its own weight. There could be further to tumble – a 30% drawdown as we had in January this year would see prices back to $40,000. Also, Treasury secretary Janet Yellen – clearly not a cheerleader – warned that “Bitcoin is an extremely inefficient way of conducting transactions and the amount of energy that’s consumed in processing those transactions is staggering”.
Tesla shares fell sharply, closing down 8.55% on the day and finishing under its 50-day simple moving average. Shares are now down over 17% since the company reported it had purchased around $1.5bn in Bitcoin to hold on its balance sheet. The fall in Bitcoin yesterday may have dragged the stock down further, such is the symbiotic relationship being perceived in the market. But we also should stress that the technicals and options market activity have also been signalling a sell-off coming for Tesla.
The wider tech sector fell. Shares in Apple, Amazon and Microsoft all dipped by 2% and the Nasdaq closed down 2.5%. The Dow Jones turned around a 200-pt drop at one stage to finish up by 0.1%. Shares in GameStop (remember that?) rose 13% to $46 as it appeared that Keith Gill, aka Roaring Kitty, had doubled up on his stake, following his appearance at the House Financial Services Committee in which he said he still liked the stock at $44.
European stocks were mixed early on Tuesday with the DAX down and FTSE 100 higher. Crude oil prices rose with WTI north of $62 and Brent above $65 with US output expected to recover slowly from the winter storms. Treasury yields continued to rise with 10s spiking above 1.38% as Janet Yellen reiterated that now is not the time to do too little. Jay Powell begins his two-day semi-annual Congressional testimony today – will he push back on yields? I doubt it – the Fed is happy to let the economy overcook this year. The market may actually prefer a bit more of a steer.
HSBC said it will restart dividends despite reporting a 34% drop in annual profits – all ancient history. Pre-tax profits slipped to $8.8bn from $13.4bn previously as Q4 adjusted profits fell 50% and loan loss impairments rose by $1.2bn. Dividends to resume at $0.15 a share.
Airline shares roared higher on the promise of a salvaged summer season, following the government’s outline of how Britain will escape the pandemic restrictions. International travel will remain problematic and subject to restrictions, isolation and testing, but bookings have shot up. IAG rallied 8%, Ryanair rose over 4%, while easyJet jumped 10%. TUI climbed 6%. IHG shares rose 3% even as it struck a cautious tone and warned recovery would not really take place until later in 2021. Strong efforts to cut costs meant FY results were a little ahead of expectations, however.
Sterling seems to reflect optimism about the reopening of the UK economy after Boris Johnson’s roadmap out of restrictions. It may be slow and abundantly cautious, but words like ‘irreversible’ raise hopes that by June we really will be beyond Covid. GBPUSD made fresh 3-year highs close to 1.41 as the dollar softened – the failures by DXY to rally out of the descending trendline marked by the Feb 17th failure at 91 – point to more dollar weakness. EURGBP also dipped to its lowest in a year as the pound rallied.
For gold, yesterday marked a strong reversal but the medium-term downtrend remains in force.
NFP review: numbers disappoint but stimulus drives sentiment
- Stock futures hold gains, yield curve steepens
- Second straight disappointing payrolls number
- Move to fast-track Biden stimulus package drives sentiment
Stocks are set for fresh record high opens on Wall Street and a 5th straight day of gains – something we haven’t seen since August. A soft jobs report has done little to upset the underlying risk-on sentiment that stems from the milking stool of equity market strength: vaccines, stimulus and earnings growth.
Although in line with expectations, really it was another disappointing number from the US jobs market. Nonfarm payrolls rose +49,000 in January, following the -227,000 decline in December, which was revised down from the initial -140,000 print last month. So things look worse in the labour market than maybe we thought but futures are looking right through this with Joe Biden’s $1.9tn stimulus package coming over the hill. The dollar is offered and the yield on US 10-year Treasury notes has leapt with spreads widening along the curve. 2s10s spread at 1.06%, highest for four years, with 5s30s at 150bps, the widest since 2015.
The decision to move on stimulus without Republican support really changes the game. As I said yesterday, Biden wants to act fast and does not want to spend his first 100 days in office horse trading with the GOP over relief plans. The price of this could be any hopes of bipartisanship in future and we may need to wait until 2022 for the big green/infrastructure package as a result, and it may prove harder to deliver. For now thought dumping an extra 10% of GDP in stimulus is being lapped up by the market.
Unemployment fell to 6.3% from 6.7% but the decline in the participation rate is a concern. U6 unemployment fell to 11.1% from 11.7%. Average hourly earnings rose +5.4% year-on-year vs 5% expected. The two month net revision took the total down by -159k. The US still has some 9.8m fewer jobs than it had in February 2020 before the pandemic struck. Permanent job losses are a concern – the number of permanent job losers, at 3.5 million, changed little in January but is 2.2 million higher than in February.
S&P 500 not bothered: Biden is going for it on stimulus.
Cable higher and hugging the trendline.
Yield curves steeper, stocks firmer to close solid week
Small cap stocks led the way higher on Wall Street yesterday as indices rose for a fourth day in a row and hit fresh record highs. The S&P 500 and Nasdaq both climbed over 1%, whilst the Russell 2000 advanced 2%. European stocks were a little higher in early trade on Friday and headed for a solid weekly gain to start February after January ended dismally. US markets had a c5% drawdown from their highs before hitting fresh peaks yesterday – we need to wait and see if this was the correction I’d expected in Q1, or whether we now face some fresh downside risks from these peaks. The yield curve is steepening – reflation-rotation is well and truly back on – with the 10-year and 30-year Treasury yields at their highest in a year and the 5s30s spread has steepened to almost 150bps, the widest since 2015.
Shares in Clover Health Investments (NASDAQ: CLOV) fell 12% after Hindenburg Research published a scathing attack on the company, which is backed by SPAC-specialist Chamath Palihapitiya, one of the vocal /wallstreetbets cheerleaders. Hindenburg says it has no position despite 4 months of due diligence for the report. This might be for a couple of reason, First, it doesn’t fancy taking on a short squeeze in the current climate (maybe it changed its mind but published anyway to help beat the short selling drum), and two, it has a vested longer-term interest in taking a position defending the practice of short selling. (Three, it could still have a short position, but I’m not that cynical). In the report, Hindenburg alleges that “Clover Health and its Wall Street celebrity promoter, Chamath Palihapitiya, misled investors about critical aspects of Clover’s business in the run-up to the company’s SPAC go-public transaction last month”, adding that Clover’s business model and software offering, Clover Assistant, are under “active investigation” by the Department of Justice (DOJ) that poses an “potential existential risk” to the firm. Question: does the /wallstreetbets crowd seek to take this on and bid up CLOV? Perhaps not, for the Redditors must be nursing some hefty losses. The ‘memestocks’ unwind continues – shares in GameStop (NYSE: GME) dropped 42% and are now down 88% from last week’s high. I hate to say I told you so when lots of people have lost money.
Sterling has rallied, gilt yields rose and bank shares are up in the wake of the Bank of England’s decision, in which it sought so hard to push back on negative rates that it actually delivered a rather hawkish message. As noted yesterday, not only did the BoE say that it does not intend to signal that negative rates are coming, but it also – from my reading of the Monetary Policy Report – suggest that the next move on rates will be to hike. Specifically, it said in its forecast that “spare capacity in the economy is eliminated as activity picks up during 2021”. Governor Bailey has a chance to speak again later today. GBPUSD pushed up to 1.37 where it turned over against the horizontal and trend resistance but is firmer again this morning and ready for another push. Failure to break through suggests the near-term downtrend remains dominant and will call for return to 1.3520 region. UK banks rallied firmly and are up again as the yield curve steepened and risk of negative rates appears to be diminishing.
NFP on tap later today. Yesterday’s weekly claims were not as bad as feared, which bodes a little better for the outlook. Seasonally adjusted initial claims hit 779,000 for the week ended Jan 30th, down from 812,000 in the prior week. Goldman Sachs said: “Following the better-than-expected jobless claims, ADP, and ISM employment component data, we boosted our nonfarm payroll forecast by 75k to +200k ahead of tomorrow’s release (vs. cons +100k, mom sa).”
Gold slipped, breaking down at the 200-day EMA to trade under $1,800. This morning it is a little firmer but the breakdown at this key MA is a blow to the bulls.
Risk bid in the teeth of surging Covid cases, Bitcoin tops $40k and Tesla goes to the moon
Risk continues to edge it: European stock markets moved higher as the dust settled over US presidential election at last and investors continue to overlook any short-term worries about the virus and focus on more stimulus, fiscal expansion, infrastructure spending and a return to near-normal later in the year that should unleash higher consumption levels. There are hopes of a more settled political environment in the US and the firm belief that fiscal expansion and continued monetary policy support will deliver further upside for equity markets. The big concern is that procyclical fiscal policy is too hot: the stimulus isn’t really needed, inflation really gets out of hand, bonds crater and market interest rates move aggressively higher, forcing central banks into needing to make some unpalatable decisions later this year. The risk is the Democrats really over-egg the pudding, but this is not a significant worry today given we are still in the midst of a pandemic and, it should be said, most of the stimulus is supporting real people in the real economy and not being funnelled into financial institutions.
The FTSE 100 ticked back up towards 6,900 in early trade and is set for a strong +6% move this week, albeit the gains this morning are tentative, and investors may lock in some of the gains over the last four days. That said, UK equities still have some catching up with peers to equalize after underperforming for some time. Meanwhile, the DAX moved clear of 14,100 after German industrial production rose 0.7%. Asian stocks also moved to record highs and whilst shares in Tokyo climbed over 2% to their highest in 30 years.
The risk-on mood followed a strong day for Wall Street with new record highs – the Nasdaq Composite rose 2.6% to close above 13,000 for the first time, while the Dow added 0.7%, closing above 31,000 for the first time. The S&P 500 rallied 1.5% and closed above 3,800 for the first time. The Dow transports, a good proxy for expected economic activity in the US, also hit an all-time high.
Gold retreated under $1,900 with the metal offered due to rising bond yields, with the US 10-year Treasury backing up to 1.10%, its highest since the pandemic struck last March. Gold found support around its 21-day SMA at $1,880 with the key 50-day line sitting a little lower at $1,870. The US dollar remains bid, with the dollar index back above 90 this morning and testing the 21-day SMA resistance at 909.13 where it has just pulled away from. In perfect symmetry EURUSD was lower at 1.2220 after testing its 21-day SMA at 1.22150. USDJPY rallied to 104 where it the 50-day SMA and strong descending trendline resistance.
Oil prices continue to edge higher and continued the steady progress with WTI firming up above $51. The decision by Saudi Arabia to unilaterally cut an extra 1m bpd continues to support sentiment, whilst the roll-out of vaccines underpins the sense that demand is reappear later this year. It should be said though that whilst EIA inventories showed a big draw this week, gasoline stocks are building.
Today’s nonfarm payrolls shouldn’t make too much difference to sentiment as investors are only really focussed on the path forward with vaccines and stimulus. Nevertheless, it’s expected the US economy added 50-60k jobs last month. Weekly initial claims were steady at 787k in the week ended Jan 2nd, from an upwardly revised 790k in the prior week.
The madness of crowds: Bitcoin surged above $40,000 before pulling back to $38,500. This could be a massive pump before a major selloff in the coming days. The rally we’ve seen is simply astonishing, but you should be watching the iFinex case closely. The Jan 15th deadline relating to a request by the NY Attorney General is coming and the rally is probably related to this. I’d be mindful of a big crash, but shorting Bitcoin has consistently been a pain trade like shorting Tesla. On which topic, shares in the carmaker popped another 8% yesterday to take Tesla’s market cap above that of Facebook.
Rentokil announced yet another acquisition – Tampa, Florida-based Environment Pest Services. It’s completed 23 acquisitions in 2020. Trading remains strong – disinfection services seem to be in demand still. Management said trading across both Hygiene and Pest Control categories continued to be strong in Q4, which they say primarily reflects strong sales from one-off disinfection services. It now expects profits to be above the top end of the range of market forecasts which currently stand at £292m to £337m. Shares rose over 2%.
Marks & Spencer warned that trading remains very challenging as it reported a 8.4% drop in group sales in the third quarter. Food LFL sales increased 2.6% in the UK, with LFL ex-hospitality up 5.7%. Clothing & Home was horrible, declining 24.1% on LFL basis. Shares traded marginally higher as the results were not as bad as feared.
Pets at Home – another Covid winner – rallied over 6% after raising its guidance for underlying profit before tax to at least £77m.
Wall Street gets more bullish on equities
Wall Street banks are getting increasingly bullish on the outlook for equity markets as election risks subside and the Pfizer vaccine creates a much rosier outlook for 2021.
Goldman Sachs raised its 2020 target for the S&P 500 to 3,700 from 3,600 previously. This implies a forward PE multiple of 21x, rising to 22x by the end of 2021.
Strategists at the bank say that a vaccine is a more important development for the economy and markets than the prospective policies of a Biden presidency. And the outlook for 2021 is extremely bullish, with the year-end price target of 4,300, implying 16% upside.
It comes after fellow Wall Street investment bank raised its year-end price target for the S&P 500 to 3,600 and said the election outcome created a ‘market nirvana’. JPM also raised its 2021 forecast for the index to 4,000.
For Europe, GS expects a “V(alue)-shaped recovery” in 2021. They see growth making a marked acceleration and expect a strong bounce in STOXX Europe earnings with policy support to remain in place.
On FTSE 100, Goldman sees the improved macro and commodities environment as supportive going forward. The bank forecasts the FTSE 100 to reach 7,200 by the end of 2021, implying 20% total return in GBP.
Since Pfizer announced its vaccine is 90% effective in phase three clinical trials markets have reacted positively though there has been a notable rotation out of growth stocks and into value and cyclical areas. This has best been demonstrated by the rally in the small cap Russell 2000 and decline in the Nasdaq 100. Whether this trend continues remains to be seen but it’s clear markets are on the move again.
Top Stocks of 2020 Update
We have updated our list of the top-performing stocks of 2020. Take a look to see which companies have emerged as winners across the year so far.
Top performing UK stocks: FTSE 350
|FTSE 350 Index||.FTLC||-17.3|
|AO World PLC||AO.L||288.7|
|Premier Foods PLC||PFD.L||172.1|
|CMC Markets PLC||CMCX.L||132.3|
|Avon Rubber PLC||AVON.L||98.1|
|Baillie Gifford US Growth Trust PLC||USAB.L||96.4|
|Scottish Mortgage Investment Trust PLC||SMT.L||87.4|
|Ocado Group PLC||OCDO.L||78.5|
|Games Workshop Group PLC||GAW.L||73.5|
|Fidelity China Special Situations PLC||FCSS.L||68.7|
|Kainos Group PLC||KNOS.L||68.1|
|Allianz Technology Trust PLC||ATT.L||64.5|
|Edinburgh Worldwide Investment Trust PLC||EWI.L||56.8|
|Pershing Square Holdings Ltd||PSHP.L||55.8|
|JPMorgan Japanese Investment Trust PLC||JFJ.L||55.2|
|Gamesys Group PLC||GYS.L||53.3|
|888 Holdings PLC||888.L||52.1|
|Ninety One PLC||N91.L||51.5|
|Baillie Gifford Shin Nippon PLC||BGS.L||50.2|
|Flutter Entertainment PLC||FLTRF.L||47.6|
|William Hill PLC||WMH.L||43.4|
|Polar Capital Technology Trust PLC||PCT.L||40.6|
|Hastings Group Holdings PLC||HSTG.L||39.5|
Top performing US stocks: S&P 500
|S&P 500 Index||.SPX||9.9|
|Carrier Global Corp||CARR.K||223.3|
|West Pharmaceutical Services Inc||WST||90.6|
|Advanced Micro Devices Inc||AMD.O||81.2|
|L Brands Inc||LB||79.5|
|Cadence Design Systems Inc||CDNS.O||70.9|
|Align Technology Inc||ALGN.O||70.9|
|PayPal Holdings Inc||PYPL.O||70.8|
|IDEXX Laboratories Inc||IDXX.O||67.1|
|Quanta Services Inc||PWR||60.9|
|Old Dominion Freight Line Inc||ODFL.O||57.5|
|Bio Rad Laboratories Inc||BIO||56.7|
|T-Mobile US Inc||TMUS.O||56.6|
|Paycom Software Inc||PAYC.K||53.0|
|Chipotle Mexican Grill Inc||CMG||52.7|
Top performing European stocks: Stoxx 600
|STOXX Europe 600 EUR Price Index||.STOXX||-8.4|
|Sinch AB (publ)||SINCH.ST||203.7|
|Evolution Gaming Group AB (publ)||EVOG.ST||139.6|
|Sartorius Stedim Biotech SA||STDM.PA||116.8|
|Dino Polska SA||DNP.WA||80.6|
|Ocado Group PLC||OCDO.L||78.5|
|Lonza Group AG||LONN.S||75.5|
|Games Workshop Group PLC||GAW.L||73.5|
|Rockwool International A/S||ROCKb.CO||67.7|
|Vestas Wind Systems A/S||VWS.CO||66.3|
|Siemens Gamesa Renewable Energy SA||SGREN.MC||62.2|
|Logitech International SA||LOGN.S||60.6|
|GN Store Nord A/S||GN.CO||58.3|
|EDP Renovaveis SA||EDPR.LS||58.1|
|Netcompany Group A/S||NETCG.CO||57.9|
|Investment AB Latour||LATOb.ST||57.1|
Source: Reuters Eikon
Stocks mixed after vaccine melt-up, watch for ongoing rotation
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 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.
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.
Vaccine winners and losers
Stocks have rallied on news that we could soon have an effective vaccine against Covid-19.
Initial optimism is exceedingly high and could fade – we should not be jumping any guns here – but ultimately a vaccine that works effectively would be good for the economy and favours the cyclical parts of the market that we thought were going to struggle as a split Congress meant less stimulus.
A working vaccine is positive for cyclicals and value – the reopening trade essentially. The dichotomy in the market is stark: the biggest gainers in a frantic session today are among those stocks worst hit by the pandemic – travel and leisure chiefly, whilst Covid winners are doing poorly. We should be careful in overreacting – but it’s clear the market is forward-looking and pricing in recovery in a number of beaten-down areas next year.
Several questions remain, which won’t be answered right away.
When does the vaccine get rolled out fully? So how quickly are we ‘back to normal’ effectively? The UK has pre-ordered 30m doses of the vaccine, but what about other countries?
Given the US election result, does this make it harder to agree stimulus that is required now for the economy?
If this is a higher yield, higher inflation world, how does the Fed start to adjust? Will it even consider thinking about thinking about raising rates? Lots of Fed speakers this week to frantically rewrite their speeches.
Major indices (ex-Nasdaq). The Dow is surging 1,500pts and set to open at a record high. The FTSE 100 is up over 5% with all sectors green, led by energy and financial and Utilities, Tech and Healthcare at the bottom but still positive as the news lifted the boats.
Travel stocks like IAG +30% and EasyJet +26% are among the best risers on the UK market, whilst Rolls-Royce +46% led the charge. Cineworld +47% and Carnival +31% also indicative of a major rotation back into these stocks that have been hardest hit by the pandemic. In the case of Cineworld the 9.4% stock out on loan points to a nasty short squeeze that may exaggerate the move.
Pubs and restaurants like JDW +15% and Restaurant Group +26% were among the other big gainers from the news. Back to normal means back to the pub – happy days!
Energy – A vaccine should help boost demand more quickly. As crude prices rallied, Shell +12% and BP +15% boosted the FTSE 100.
Financials – A vaccine is a yield steepener – Lloyds and Barclays both +10%.
Crude oil naturally rose on expectations that a working vaccine will equate to a swifter demand recovery, at least much quicker than we would have thought only yesterday.
Covid winners: Stocks that won because of the pandemic are naturally on the hook. Stay at home and WFH stocks fell, hurting the Nasdaq. Zoom –15% and Peloton –11% pre-market is indicative of the rotation out of these Covid winners into reopening trades.
UK stocks in the red included the main winners from the pandemic – Ocado, Fresnillo and Kingfisher (back to normal means no DIY – oh happy days)
Keep an eye on these stocks when the US cash equities open later and (Covid Winners Basket).
Bonds – US Treasuries were offered with the 10-year yield spiking north of 0.92%. Inflation could come through next year with large excess savings to be deployed in many sectors of the economy, notably in travel.
Gold – higher yields weighed on gold prices, though we would expect inflation expectations to rise and this could offer ongoing support to prices.