HOPES RISE FOR A COVID VACCINE
News of Joe Biden’s election victory was rapidly upstaged by Pfizer and BioNTech announcing that phase III trials had shown their Covid virus was 90% efficient. What's more, no real secondary effects have been noted so far. Management will have to wait until the third week of November before requesting emergency FDA approval.
Production could start before the end of December. This augurs well especially as other companies like Moderna are working on the same ARN vaccine type.
Markets shot up on the news with Europe gaining almost 5%. Sector rotation was even more remarkable as investors piled into snubbed companies likely to benefit from an economic rebound. Financials and energy stocks soared more than 15%. In contrast, the Nasdaq fell during the session when the vaccine news broke. Government bond yields rose sharply on expectations that growth would be higher in 2021. Indices then took a breather after several sessions.
COVID-19 has exposed the global cooperation gap
There are still big unknowns ahead, notably on the pandemic's short term trajectory. There are also uncertainties over the vaccine’s real efficiency, its safety and its supply chains. Even so, the outlook has cleared now that the elections are behind us and sanitary prospects are improving. A new stimulus package is taking shape in the US. It would be even bigger if Democrats were to win a majority in the Senate in January. And a vaccine allowing some control over the pandemic’s trajectory would lift economies.
Against this backdrop, we have raised exposure to European equities and also US domestic and cyclical plays which are still under investors’ radar. They will benefit in full from the vaccine and any stimulus package. We also think it important to have portfolios which are well-balanced both from the sector and the factor point of views. This is why our allocation is now more weighted towards cyclicals. We have also cut US bond exposure further as segment risk now looks asymmetrical.
EUROPEAN EQUITIES
Markets had been reassured by Joe Biden's election victory but spiked last Monday when Pfizer and BioNTech announced encouraging news on their joint venture Covid vaccine. There are now prospects a solution to the current epidemic will soon be deployed. Europe outperformed as the continent has been particularly hard hit by the virus and subsequent restrictions.
NCyclicals had borne the brunt of the crisis so rebounded sharply. Sectors like oil, tourism and leisure and autos surged as hopes rose for a quicker-than-expected recovery and upward earnings revisions. Banks outperformed as the yield curve steepened.
But markets paused after a few sessions when new cases in the US accelerated. Government bond yields retreated as US inflation remained muted and Christine Lagarde reaffirmed the ECB's long-term commitment to intervene if necessary. Sectors boosted by the vaccine announcement returned to the back of the queue. Meanwhile, telecoms rose as Cellnex bought phone masts in Europe from an Asian conglomerate, rumours swirled around a possible bid on Holland’s KPN and Deutsche Telekom raised guidance thanks to strong momentum at T-Mobile US.
Adidas and Henkel were among companies preaching caution for the end of the year due to the epidemic resurging in Europe and the US. But US and Chinese momentum helped companies like Burberry.
US EQUITIES
Sector rotation left the Dow Jones 2.43% higher and the S&P500 0.76% better while the Nasdaq finished the period 1.53% lower.
The big shift was triggered by Pfizer which last Monday announced that partial Phase III trial results showed its Covid vaccine was 90% efficient, or much more than expected. Sectors which had been snubbed since March enjoyed vigorous rebounds and lockdown stocks tumbled.
Vaccine enthusiasm waned later on in the week as there are still lots of question on vaccine logistics and how long its effects might last.
Meanwhile, Joe Biden started transition preparations even if Donald Trump continued to issue writs. Senate majority leader Mitch McConnell said Congress might be able to approve a limited stimulus plan by the end of the year.
New US Covid cases came in above the symbolic 100,000 mark for 8 days in a row. Chicago, Detroit and New-York, along with California and Iowa, reintroduced restrictions.
Christine Lagarde, Jerome Powell and Andrew Bailey joined in saying a vaccine would not be enough to end economic difficulties from the pandemic.
WTI jumped 10.3% at the beginning of the week but then retreated to $41.10 when inventories increased unexpectedly by 4.3 million barrels.
Weekly jobless claims remained high but fell to their lowest level since March. Consumer price inflation was unchanged in October.
The vaccine boost led Investors to take profits on lockdown stocks. Zoom Video was the biggest casualty but Netflix also tumbled. Theme park companies like Comcast and Walt Disney rose sharply. Disney also unveiled better-than-expected results across all divisions. Cisco also reported encouraging figures. The slump in orders due to soft SME activity reversed during the quarter with orders down only 8% compared to a 23% drop in the fourth quarter of its fiscal year ending July 2020.