Tuesday, November 24, 2020

Asia Times: Wall Street soars on third week of vaccine news; Joe Biden selects Janet Yellen as Treasury secretary candidate

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Market Recap: Wall Street soars on third week of vaccine news; Joe Biden selects Janet Yellen as Treasury secretary candidate

Wall Street stocks surged for the fourth Monday in a row, as more vaccine news helped buoy the ongoing rally in the equities market. The latest vaccine to have reported its results is the candidate from AstraZeneca in collaboration with the University of Oxford, which showed an average of 70% of participants in early analysis of its phase three data. This marks the third consecutive week of vaccine news, boosting investor sentiment to all-time highs. Outside of vaccine news, US presidential candidate Joe Biden has picked his Treasury secretary candidate in former Chair of the Federal Reserve and White House Council of Economic Advisors Janet Yellen. If confirmed by the Senate, Yellen will become the first woman to head the US Treasury Department and the first person to ever head the Treasury, Fed, and White House Council of Economic Advisors. Markets reacted positively to the news since the former Fed Chair has been vocally supportive on the need for more fiscal stimulus from the federal government in addition to her historical track record supporting easy monetary policy.

AstraZeneca's vaccine may pale in comparison to Pfizer's and Moderna's offerings, but it also a fraction of the price and easier to transport. What was more interesting was that the vaccine's effectiveness rose to 90% when using half a dose followed by a full dose in a month compared to a regimen of two full doses that showed an efficacy rate of 62%. This result does introduce concerns on dosing since the two dosing regimens differ widely, which was likely reflected in the 3.81% decline in the drug maker's stock price on Monday. We note that AstraZeneca has announced plans to submit the data to the WHO for an accelerated pathway to making the vaccine available to low income countries, as well as send the result for publication in a peer reviewed journal. An approval from the US regulatory body may still be a distance away as it will likely need to move further along in the phase three trial process. On manufacturing and distribution, AstraZeneca expects to have 300 million doses ready to ship worldwide by the end of Q1 2021, with production estimated at a rate of 100 to 200 million doses monthly. Its distribution to the UK is expected to reach 4 million doses by year end and 40 million by the end of Q1. As per yesterday's brief, AstraZeneca's vaccine candidate is expected to cost between US$4-5, compared to Pfizer/BioNTech's offering that is estimated to be at US$39 for two doses for developed nations. More importantly in our view, is that AstraZeneca's offering can be stored at refrigerator temperatures for long-term storage and transport which is more economically efficient in comparison to Pfizer and Moderna due to both companies' usage of the mRNA technology, implicitly making it more viable (and consequently in line with its goal) for global distribution. This may put some downward pressure on some companies that produce cold storage or storage equipment (Twinbird Corp, Daihan Scientific, etc) that could be used for vaccine transport and storage that have seen increased volatility over the past two weeks.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.12% +327.79 29,591.27
S&P500 +0.56% +20.05 3,577.59
Nasdaq +0.22% +25.66 11,880.63
*Source: Bloomberg

Major indices advanced but was weighed down by Big Tech while small cap indices surged. S&P500 sector performance was a strong indicator of the bullishness in the market, with energy leading cyclicals in gains with the sector rising more than 7%. Tech and tech-related stocks that have benefited from the pandemic mostly weighed on the S&P500. FAANG stocks all declined during the day. In contrast, small cap indices outperformed each major index, signalling yesterday's strong shift to cyclical stocks. In our view, the shift is still justified as valuations between sectors continued to converge at a faster rate due to news of the vaccine. Short-term headwinds may materialise however, due to the impact of rising lockdown restrictions in the US and may be a sign that some downside protection in either the form of a smaller allocation to tech relative to small-caps and cyclical allocations or put option protection is likely to be beneficial in the short-to-medium-term when good news starts to ease.

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The dollar gained against almost every major currency, but this was not a risk-off day. Gains in the greenback may be attributed to the more bullish sentiment that Pfizer and Moderna's vaccine appears to be more effective compared to AstraZeneca's, which will benefit the US more since both Pfizer and Moderna's vaccine candidate has a bigger allocation of distribution to the US in comparison to other parts of the world. This boosts demand for risk assets in the US in our view, which could potentially have driven the greenback. Sterling gained the most, boosted by both expectations for AstraZeneca's vaccine to be distributed in the UK quicker in comparison to the rest of the world and as a post-Brexit trade deal continued to be priced into the currency in the short-term. the underperformance in the Japanese yen was indicative of a risk-on day in contrast.

Markit's preliminary PMI data for November came in mostly better-than-expected across the EU, UK and US. Germany's services sector fell deeper into contractionary levels as expected (A: 46.2, E: 46.3, P: 49.5), while manufacturing expanded more-than-expected (A: 57.9, E: 56.0, P: 58.2). This is in line with the current state of the economy since Germany's lockdown mostly only impacts customer-facing services industries and not manufacturers. The UK's PMI data for both its manufacturing (A: 55.2, E: 50.5, P: 53.7) and services (A: 45.8, E: 43.0, P: 51.4) sectors beat expectations, adding to the optimism for the bloc. Readings for the US in manufacturing (A: 56.7, E: 53.0, P: 53.4) and services (A: 57.7, E: 55.0, P: 56.9) beat as well, likely a resulted of both post-presidential election certainty and vaccine optimism.

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Safe havens fell across the board as risk aversion fell flat on Monday. Gold declined along with silver. The Japanese yen fell across all major G10 currencies. US Treasuries dipped, pushing benchmark 10-year yields 2.9bps higher to 0.85%. The VIX tumbled more than 4% while VXN contracted 1%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -1.77% -33.13 1,837.86
Silver -2.40% -0.58 23.60
USD/JPY +0.64% +0.66 104.52
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.16%
10-Year +2.9bps 0.85%
30-Year +3.4bps 1.55%
*Source: Bloomberg

Crude oil futures saw an uptick on Monday following news of AstraZeneca's vaccine. Brent hit an eight-month high, while WTI's December 2021 - March 2022 spread flipped back into a bullish backwardation structure as oil traders become increasingly optimistic on both demand and supply. The backwardation structure suggests that traders are expecting crude oil supply to tighten in the coming months, despite US crude oil inventories remaining at elevated levels. Additionally, the spread between WTI and Brent futures widened to its largest since July, signalling that demand for US crude exports could be further supported due to the discounted rate being an incentive over shipping costs. Expect oil markets to be focused for the next OPEC+ meeting next week which could be complicated following these new developments in pricing data.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.45% +1.10 46.06
WTI +1.51% +0.64 43.06
*Source: Bloomberg

In Asia, stocks look set to track the US market in gains on Tuesday morning. The Nikkei was surging upwards of 2% as traders in the region compensate for Monday's closure and as valuations were driven by the sharp dip in the Japanese yen. The KOSPI and ASX200 were both trading in the green in early hours of Tuesday's trading day as well. Futures tracking major indices in the US were trading well into the green as well with optimism continuing to spill over into Tuesday as of 9.25am (GMT +8).

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

  • Germany Q3 GDP (F) (3pm)
  • Germany Nov Current Assessment/Expectations (IFO (5pm)
  • US Consumer Confidence (Conf. Board) (11pm)