Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Head of FX Strategy
Summary: Global markets got quite a jolt yesterday after US drug company Pfizer announced that trials of its Covid-19 vaccine had prevented some 90% of infection. The initial reaction was a massive rally in equities, particularly in sectors and geographies like Europe, where the virus has hit most heavily. But later, the move faded in places, especially in US stocks and the US dollar, though gold remained several percent lower after a 100-dollar freefall on the news.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - volatile session yesterday in the US equity futures with S&P 500 futures jumping 3.3% on the news from Pfizer that its vaccine has hit 90% efficiency in preventing Covid-19. However, the optimism has failed to extend momentum in the short-term as S&P 500 has given up the gains from the news trading only up 1.2% over the past 24 hours. Nasdaq 100 futures were dramatically lower and down as much as 6% from yesterday’s intraday high as the vaccine reverses the outlook for many of these companies. In Nasdaq 100 future the critical support line is around 11,712.
NZDUSD and AUDNZD – The Reserve Bank of New Zealand (RBNZ) is set to meet and announce rates and other policy priorities tonight. While the previous story has been that the Bank and its Governor Orr are aggressively dovish and preparing for new Funding-for-Lending scheme and laying the groundwork for negative rates, one wonders if a bit more uncertainty could creep into their forward guidance on the negative rates issue, given the recent vaccine news. NZD could surge on less dovish than expected guidance.
EURGBP and GBPUSD – As expected, the House of Lords voted down key clauses in the controversial Internal Market Bill that would override portions of the Brexit Withdrawal Agreement, but Boris Johnson vowed to press on with the bill in the House of Commons – as the House of Lords has no authority to stop legislation, only delay it. This should be an important week for Brexit news, as the November 15 date (this Sunday) has been flagged as the latest deadline for a time frame was flagged as an important time-frame for the announcement of a deal. EURGBP has slipped below the 0.9000 fulcrum - likely on the Covid vaccine hope, given the UK’s struggles with its resurgence, while the sharp recent GBPUSD rally is mostly a function of USD weakness.
Gold (XAUUSD) and Silver (XAGUSD) both suffered sharp corrections yesterday as the vaccine news – wrongly in our opinion – helped trigger a 115 dollar drop in gold before once again finding support at $1850/oz, ahead of $1836/oz, the 38.2% correction of the March to August surge. Ten-year bond yields popped to a March high with real yields, a key inverse driver for gold, rising to –80 bp. The vaccine can kill Covid-19 but not remove the mountain of debt that has been accumulated during the past six months. With super loose monetary policy in place across the world we could see an increased risk of a policy mistake being made. When that happens, we may see inflation start to make a comeback, thereby supporting demand for protection.
Brent crude (OILUKJAN21) and WTI crude oil (OILUSDEC20) received a major boost from the Pfizer vaccine news but with Covid-19 cases still surging, not least in the U.S. the short-term outlook remains challenging. In this latest update we highlighted the reasons why crude oil fundamentals remain too weak to support a sustained breakout and that mean reversions may follow in the short-term. Brent trades lower after finding resistance at $43.55/b, an area around which the price has been rejected on several occasions since September. Focus this week, apart from additional vaccine news and rising Covid-19 case counts are monthly oil market reports from EIA today at 1700 GMT, OPEC (Wednesday) and the IEA (Thursday).
10-year Treasury yields continue to rise, they will find now resistance at 1%. 30-year Treasury yields yet to test 1.74% resistance. (10YUSTNOTEDEC20, 30YUSTBONDDEC20). The front part of the yield curve steepened faster than the 5s30s on the day of yesterday. 10-year Treasury yields rose by 16bps since they dipped to 71bps last Thursday, breaking their resistance line at 90bps. 30-year Treasuries rose equally but didn’t test yet their resistance line at 1.74%. We believe that the selloff in Treasuries will continue throughout all the week, especially considering news concerning a viable vaccine from Pfizer. The only thing that can stop rising yields now is the Federal Reserve.
Risky assets rose amid Pfizer’s news on Covid-19 vaccine (HYG:arcx). Price of credits rose as news of a viable coronavirus vaccine came out yesterday. High yield corporate bonds led the gains with the hospitality and consumer and staples sector leading the way. American Airlines was the top performer within US high yield bonds followed by Diamond Sports and Transocean. Risky assets will most likely continue to be well bid throughout the week supported by the outcome of the U.S. election and news of a vaccine.
Pfizer (PFE:xnys) - shares jumped 15% on the news that the company has seen 90% efficiency on its Covid-19 vaccine dealing a blow to the publicly listed companies providing tests to countries fighting the pandemic. However, during the session questions arose about the speed of manufacturing but also the safety of the vaccine given it is the first time in history that a vaccine has been created using the mRNA technology. Shares ended the session 8% higher.
Beyond Meat (BYND:xnas) - shares were down 22% in extended trading as the plant-based meat producer delivered disappointing Q3 numbers with revenue hitting $94.4mn vs est. $132.1mn and increasing the loss to EPS $-0.28 vs $-0.05 expected. The company excuses the miss with Covid-19, but it does not seem credible as Q2 numbers were up q/q, but even worse the company is not providing any guidance for its investors.
Zoom (ZM:xnas) - shares plunged 17% on the vaccine news as the work-from-home trend could take a massive hit from a vaccine restoring old habits of working at office buildings.
What is going on?
Pfizer (PFE:xnys) announced strong indications of success with its vaccine candidate – with 90% fewer people in a trial getting symptomatic Covid-19 cases relative to a placebo. Some 39,000 patients have received a second dose of the vaccine and the company may file for emergency use authorization in coming weeks if the drug continues to prove safe. See more below in What’s Next?. Moderna’s (MRNA:xnas) Covid-19 vaccine candidate uses a similar delivery technology.
US Treasuries sold off heavily in the US, drastically steepening the yield curve and snapping USDJPY back higher. US yields rose to their highest levels since the worst portion of the Covid-19 crisis to nearly 1.00% for the 10-year treasury and 1.75% for the 30-year. This turned the tables on USDJPY traders, with USDJPY not only snapping back above 104.00, but all the way above 105.00. The treasury move yesterday was more “sticky” than some of the other reactions to the Pfizer vaccine candidate news yesterday.
Vaccine hopes drive implied equity volatility continues higher. The VIX dropped to as low as 22.41 getting close to the long-term equilibrium level in VIX term structure that we have been talking about. However, the vaccine hopes have caused turmoil in US technology stocks and a potential vaccine changes the outlook for some of these companies driving up implied volatility in short-term. Our view is still that implied volatility will come down as realised volatility will not be as bad as feared.
What we are watching next?
What details emerge from the Pfizer story that allow continued confidence that an effective vaccine will be forthcoming. There are some logistical complications with this vaccine, which must be kept at a temperature of negative 70-80 degree until within a few days of use – most hospitals don’t have anything approaching. But the testing is proceeding and by the third week of November, the company says that sufficient time has passed to observe if there has been any adverse reaction in trial patients, and if none are found, it can file for “emergency use authorization” that would allow high risk people to be vaccinated.
Grain markets await the November supply and demand update from the U.S. Department of Agriculture today at 1700 GMT. Compared with other months the November report tends to be a quiet one but with soybeans at a four-year high, China hoovering up corn supplies and wheat being troubled by weather worries, traders will be looking for data to support the current strong trends. According to surveys, the report is expected to trim estimates for U.S. soybean and corn yields and inventories.
Q3 earnings season continues this week. Below list shows the largest companies reporting this week globally.
Economic Calendar Highlights for today (times GMT)
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