Tuesday, November 10, 2020

Asia Times: Vaccine news sends cyclicals surging on Monday while Big Tech and stay-at-home stocks dip

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  • Dollar
  • Gold
  • Yen
  • Euro
  • Stocks
  • Oil
  • US earnings' season

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Market Recap:  Vaccine news sends cyclicals surging on Monday while Big Tech and stay-at-home stocks dip

Equities in the US soared on Monday as financial markets get its first taste of positive phase three vaccine developments. Pfizer and BioNTech reported that early data from its phase three trials for its experimental vaccine showed that it was able to prevent more than 90% of infections in a large-scale study of over 40,000 participants. No serious safety concerns were observed as well, helping to buoy sentiment that more good news may be on the way in the form of successful vaccines before the end of 2020. The consensus on the street - as seen by soaring stock prices - was likely that a vaccine, coupled with record levels of stimulus around the world is likely to drive risk assets into a strong bull market in 2021 and 2022. Pfizer's press release also stated that the drug maker estimates to submit the vaccine for Emergency Use Approval (EUA) to the US Food and Drug Administration (FDA) in the third week of November. Important things to note about the ongoing study is firstly that the data above is still preliminary data from trials that has not formally concluded, and secondly that the drug maker is expected to produce up to 50 million and 1.3 billion doses of the experimental vaccine in 2020 and 2021 respectively. The full phase three trial has yet to be submitted for peer-review publication as well. Still, the report was welcomed by investors as a strong sign that things may return to pre-Covid soon enough, causing a surge in riskier assets through the day.

Indexes Daily Change (%) Net Change Closing Price
Dow +2.95% +834.57 29,157.97
S&P500 +1.17% +41.06 3,550.50
Nasdaq -1.53% -181.45 11,713.78
*Source: Bloomberg

Cyclicals surged, while mega-cap tech and work-from-home stocks fell the most on the day. Among S&P500 sectors, energy surged the most as investors priced in a post-vaccine environment for energy demand. Oil producers were likely also boosted by the surge in crude oil prices following the positive news of Pfizer's vaccine trials. Major US banking stocks each closed the day upwards of 10%. As most would expect with news of a successful vaccine, cruise liner, airline and hotel industry shares all surged on Monday, filling the top 20 performers in the S&P500 with gains upwards of 20%. In contrast, stocks that fell included shares that benefitted from the onset of the pandemic, such as Netflix. Interestingly, investors ignored calls from Joe Biden on the need for "bold action to fight this pandemic", a signal that lockdown restrictions are likely to materialise after the potential transition of power in the US even with a successful vaccine since it is unlikely to reach each and every citizen in America - or globally - at the rate of estimated production. Strong cross-sector movement was already likely since Biden was projected to win the presidential elections, but now we are seeing a much stronger convergence in valuations due to the vaccine news. However, we do expect some mean reversion to occur in the short-term due to the sharp spike in stock prices, as well as fundamentals that suggest that markets may be too optimistic on the vaccine news. That being said, opportunities may be better served cross-geographically as Asian indices are still well below its average relative valuations in respect to the S&P500. In particular, the spreads between the S&P500 and the Hang Seng Index price-to-earnings ratios are still well below levels seen before pandemic. In our view, Asia may be able to benefit more from a vaccine, since the count of Covid-19 cases in the region remain mostly under-control, as opposed to the western hemisphere, which at this point, an effective treatment may be more useful. Additionally, several questions regarding the vaccine still remain unanswered, including the time period where the vaccine is effective, the expected timeframe in which the entire process of manufacturing to distribution can be completed and the take-up rate of a vaccine. We may have seen this negatively impact stock prices towards the end of the trading session.

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Similarly, the dollar mostly fell against most other G10 currencies thanks to the surge in risk appetite across markets. The Dollar Index was supported by the underperformance of sterling, the euro and Japanese yen. The euro and sterling faced pressure likely mainly due to hedging against Brexit talks. Safe haven currencies fell upwards of 1% as traders became increasingly more bullish that commodity-linked currencies are more likely to outperform from here on out.

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Safe haven assets tumbled following news of the vaccine. Gold dived more than 4%, as investors diverted attention away from the precious metal despite its relative de-correlation to safe haven positions in recent weeks. Silver suffered a 5.88% pullback. Notably, the Gold/Silver cross still remains at the bottom end of its current range. The Japanese yen slid against each and every G10 currency. US Treasuries were sold off across the board as well, with benchmark 10-year yields spiking up 10.5bps to 0.92%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -4.53% -88.31 1,863.04
Silver -5.88% -1.51 24.11
USD/JPY +1.96% +2.03 105.38
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +1.8bps 0.17%
10-Year +10.5bps 0.92%
30-Year +10.9bps 1.71%
*Source: Bloomberg

Oil futures surged back in to the 40s price range on bullish sentiment from oil traders on Monday. The vaccine, as well as remarks from Saudi Energy Minister Prince Abdulaziz bin Salman stating that the deal between OPEC+ members remain flexible and can be tweaked according to market conditions helped oil prices rally the most since June. However, headwinds for oil prices still remain with energy demand more likely to be negatively impacted in the short-term due to eroding margins in the refining space as well as stricter Covid-19 across Europe and the UK. As cases in the US continue to tick higher, the risk of additional mobility restrictions there grow as well. Still, positive news from the vaccine is likely to floor oil prices, meaning that while downside is still probable in the short-term the medium-to-longer-term prospects for energy is likely perceived to be improving.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +7.48% +2.95 42.40
WTI +8.48% +3.15 40.29
*Source: Bloomberg

In Asia, stocks started Tuesday morning with a strong rally as well on the back of the positive vaccine news. Aside from a potential vaccine, Asian stocks are likely to also benefit from stronger demand for value stocks thanks to projections for Biden to win, due to his party's propensity of spending and lower likelihood of deterioration in trade relations and slower deglobalisation. Tech-heavy indices may however suffer downward pressure resulting from the reduced bullish sentiment on that sector with investors starting to shift into cyclical and value positions. The Nikkei and ASX200 were each trading upwards of 1% while the KOSPI was marginally higher at 0.15% on Tuesday morning in Asia. Futures tracking major indices in the US were mixed as of 9.11am, with the tech-heavy Nasdaq showing some signs of a possible recovery following Monday's selloff.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei +1.25% +314.11 25,153.95 9:01:10 AM
KOSPI +0.15% +3.75 2,450.95 9:21:10 AM
ASX200 +1.64% +105.30 6,404.10 9:20:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.04% -13.00 29,035.00 9:11:13 AM
US Futures -0.04% -1.50 3,542.50 9:11:13 AM
Nasdaq 100 Futures +0.16% +19.50 11,840.00 9:11:12 AM
*Source: Bloomberg

Economic releases for the day ahead include (all timings in GMT +8):

  • China Oct Inflation Rate (CPI) (9.30am)
  • UK Oct Claimant Change (3pm)
  • UK Sep Unemployment Rate (ILO) (3pm)
  • Germany Nov Expectations/Current Situation Survey (ZEW) (6pm)

Companies reporting earnings next include (all timings in GMT +8):

  • Adidas (8pm)
  • BioNTech (9pm)
  • Corsair Gaming (9.30pm)
  • Norwegian Cruise Line Holdings (11pm)
  • Lyft (5.30am +1)