US equities soared Monday amid a most frothy global risk rally. The S&P was up 2¾% heading into the close after the Stoxx600 rose 4% and FTSE up 4.7%. Bonds sold off globally, US10Y yields rising 14bps to 0.95%, the highest since March 19. German 10yrs lifted 11bps, oil was up almost 10%, and gold down nearly 5% on the back of far better than expected results by the vaccine candidate developed by Pfizer and BioNTech.
Those results showed a more than 90% effectiveness rate among 94 subjects infected with Covid-19 and who had at least one symptom. Pfizer indicated it remains on target to seek sale permission from regulators by the end of this month. Depending on how long regulators take to review it, the distribution could then start within months.
And while risk assets have pared a good chunk of their initial knee jerk reaction to this remarkable healthcare breakthrough, it’s hard to argue that the vaccine success comes in the nick of time for travel and oil complex.
The investment world is now debating whether the rally is sustainable or if it will fade, considering it will take six months for many of us to receive the vaccine (assuming a willingness to take it), which to me is a sign that some folks haven't done much and are trying to figure out the next leg. I would expect a bit more dispersion on both sides of the trade going forward. The tech trade, where there are incredibly high valuations dependent on the lower for longer interest rates, may pull back further.
The vaccine distribution may eventually alter the course of the central bank and government's fiscal policies. Simultaneously, the powerful short squeeze in some of the Covid-sensitive names will dry up and, most likely, the real money will flow into the higher-quality words on that side of the trade.
While the bull market just received a "by George, we've done it!" shot in the arm as the vaccine will genuinely be a game-changing panacea for global healthcare concerns, those heartening developments are giving way to worries that lawmakers will pass a smaller stimulus package, and the next move for central bankers will not be lower.
It’s just not the vaccine that will hold back US infrastructure spending. There’s also some cynical objection from bi-partisan politicians who are not keen to do anything to boost a political rival. After this highly contested election – and assuming Georgia stays red – the Democrats will struggle to get any frothy legislation through the hawkish Red Senate.
There’s a lot for investors to take in right now, not to mention the Joe Biden electoral victory has ushered in a perceived transformation in geopolitical risk as investors debate how the world might be a more peaceful place during the next four years. After such a monumental eureka moment, look for the market to hash out a base before eventually griding higher.
For oil market concerns, two "puts" are better than one after oil rallied by over 9% on the vaccine news after an initial leg-up when Saudi Arabia's energy minister, Prince Abdulaziz bin Salman, at the ADIPEC conference, said OPEC+ cuts were to be extended to 2022. At a minimum, oil has not one but two price planks that should hold the floor on oil prices while investors wait for the vaccine to get rolled out.
Unquestionably, the vaccine will be a game-changer for the oil complex. However, the pandemic still matters most for near term concerns. As is the case for all commodities, oil is priced on the spot markets, so markets are still exposed to the virus where the current struggle is to breach the current supply level before prices can even think about starting to rise in any meaningful way. As lockdowns in Europe accelerate and localized outbreaks in the US widen, it suggests that the oil market’s top side ambitions will be held in check as it will likely take six months for many of us to receive the vaccine.
Macro liquidation was the unanimous flow in gold's $100 pullback, and it explains the frantic price action. Massive stops in cascading fashion got triggered below $1,940, and also the psychological $1,900 level.
As has been the case in prior sell-offs, gold begins to flow into stronger hands at the $1,850 level, and it seems like the market could be basing.
The medium-term macro picture remains supportive, given both fiscal and monetary stimulus will be required to kickstart the economy while emerging from the second wave of the pandemic. But gold will continue to take its cues from the dollar and real rates while keeping an eye on the equities rally.
Gold vols spiked with spot collapsing earlier in the day and buyers have emerged across the curve, with particular emphasis on the front dates. Once gold stabilized today around the 1860-1870 area, vols came off a touch.
The MYR put on a great showing after markets splurged in EM debt on the vaccine news, which should eventually be a game-changing panacea for oil exporters. Oil is a bit lower, and the US dollar is opening up a stronger in Asia today, so there could be a little bit of profit-taking taking cues from the USDCNH back trading near 6.62 on the stronger G-10-dollar impulse.
The Turkish Lira
FX markets reacted positively to Turkish Finance Minister Albayrak's departure, with USDTRY ripping lower. And, as expected, Tokyo retail sold huge USDTRY amid expectations for a rate hike from the Central Bank of Turkey.
The optimistic read from all this is that Erdogan has realized the current policy approach could not be sustained. The more pessimistic view is that both Uysal and Albayrak went for their failures and that revolving door policy will remain the same irrespective of the personnel changes.
Following Turkey's finance minister and central bank governor's departure over the weekend, I would expect a 500bp rate hike from the central bank and more transparent communication with the market going forward. Those locals with savings in USD may start to shift investments back into lira.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower