It’s just a jump to the left

Pfizer announces vaccine breakthrough

No, I am not talking about the US election, which markets are, thankfully, moving on from quickly. Financial markets danced the time warp back to the future overnight, as Pfizer and BioNTech announced that the preliminary results of their Covid-19 vaccine indicated a 90% effectiveness. The results need to be peer-reviewed and then validated before fast track approval from the FDA can be given. But the two companies appear on track to start rolling out initial doses before year’s end.

Ever the voice of reason, I note that it is a two-shot vaccine, meaning you need to divide that headline number by two. So, 10 million doses for the UK by year-end for example (they have been Boris-booked), is actually 5 million. Not enough to vaccinate all the older people, but hopefully enough to vaccinate health and emergency service workers. Politicians should probably lead from the front and form up at the rear of the queue.

We are likely to see more announcements from other vaccine candidates in the coming weeks, hopefully, positive as well as winter approaches. Of course, this won’t magically reset the clock to November 2019. The logistical challenges in production and distribution are immense. Pfizer/BioNTech may have given governments all over the world a giant social distancing headache as they try to enforce lockdown measures against increasingly resistant populations.

That mattered not for financial markets though, who piled into massive cyclical value stocks versus working from home big tech, rotation trade. Even Cher couldn’t turn back time as well as the global stock markets. Bombed out sectors such as aviation, travel, leisure, big oil and yes, our beloved banks, time-warped back to 2019 with giant rallies. Technology, home working and fitness, online shopping and associated logistic companies all retreated.

The US yield curve steepened dramatically as talk immediately turned to global central banks, and the Federal Reserve needing to do less monetary stimulus going forward. Oil prices rallied over 6.0% as markets pencilled in increased consumption in 2021, much to the relief of OPEC+. The safe-haven Japanese yen collapsed much to the relief of the Japanese Government and Bank of Japan. The real Rocky Horror Picture Show, though, was precious metals.

I had warned yesterday that gold’s upside breakout could be vulnerable to gut-wrenching downward corrections. But the overnight USD90 an ounce fall resembled grievous bodily harm. Silver also ended up in the emergency department as well for treatment. A stronger US dollar, supported by rising US yields, gave gold a Tyson-esque one-two punch combination that no boxer could shrug off. The overnight moves in financial markets were screaming future inflation, inflation-hedging gold was just screaming.

I have very little doubt that we will see the same sort of action in Asia today. Previously unloved airlines in the region (the list is long) will soar. Regional stock markets in Asia, full of legacy industries such as banks, utilities, airlines, and property companies, but light on technology companies are set to outperform. It should be a good day in Hong Kong and Singapore.

We should be clear, despite global markets dancing the Time Warp overnight, the world will not magically return to normalcy in an instant. Monetary policy will remain looser for longer, pimping up asset prices for years to come. Governments’ balance sheets across the world will be in intensive care, as will many companies. We will not be flying to Bali for long weekends next week, and Covid-19 will remain a genuine danger to millions for the foreseeable future.

Still, I expect the excellent rotation trade to persist for some time to come going forward unless the vaccine candidates start hitting an FDA approval wall. Only a couple will have to make it through though to keep the music playing. I also do not doubt that a giant consumption/leisure/travel wave is lapping at the gates that will be a sight to behold as the planet vaccinates itself. I suspect it will remain dammed up until late 2021 though.

That won’t matter to financial markets one bit; they long ago took a different path to the stars than us mere mortals stuck in real life on planet Earth. One unintended consequence is likely to be the US and possibly Europe, taking their foot off the fiscal accelerator. The developments overnight likely mean the chances of a President Biden getting a sizeable fiscal stimulus package through a Republican Senate have now diminished to about zero. If that is repeated around the world, the global recovery will probably be slower than it could have been.

Nevertheless, and despite my reservations, overnight developments hint at better times ahead.

Happy Tuesday.

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