Overnight: Then Suddenly, The Skies Cleared

By Greg Peel

Breakthrough

Let’s flip the usual format this morning in light of the news overnight the Pfizer/BioNtech vaccine candidate has achieved a 90% success rate in its phase 3 trial – a result described by Dr Fauci as “extraordinary”. Pfizer will now seek emergency use approval from the FDA. The news broke ahead of the Wall Street open.

For months now Wall Street has made occasional attempts to rotate out of high-flying tech stocks and stay-at-home beneficiaries that had been deemed to have run too far, and into the cyclical value stocks that had remained heavily impacted by the virus. Each attempt lasted little more than a couple of days before normal programming was restored.

September saw the biggest switch, but eventually that move was overrun by the second wave of the virus running out of control across the globe. The northern winter was looking very dark indeed.

Last night all changed. The long-anticipated rotation trade came to pass in Wall Street’s opening step-jump. From the bell the Dow was up 1600 points. At the close, the tale is told by a Dow up 834 or 3.0% and the Nasdaq down -1.5%.

Clearly it was not a one for one rotation. Moves up in cyclicals that in many cases have remained some -50% or more below their February levels were substantial. Moves in tech stocks and other stay-at-home winners were negative but not by the same percentage levels, yet still substantial for the mega-caps in impact.

Travel related stocks, eat-in restaurants, cinema chains, in-store retailers – you name it — jumped 20-30%. Banks jumped 10%. The US ten-year bond yield surged 14 basis points to 0.96%. Gold fell eighty bucks.

Amazon fell -5% bearing in mind that is significant in quantum compared to gains in airlines and so on. Zoom fell -17%. Meal delivery service Grubhub fell -11%. These are just some examples, but you get the idea.

Apple and Microsoft fell -2%, thus not overly impacting on an otherwise industrial-stacked Dow. Pfizer itself rose 8%. JP Morgan rose 13%. Caterpillar rose 6%.

Consumer discretionary stocks were split between virus victims and virus winners. Clothing store chain Gap rose 8%. Online retailer Etsy fell -17%.

With eat-at-home no longer the theme, consumer staples stocks fell. Proctor & Gamble dropped -4%.

Oil prices jumped 8%. Exxon jumped 13%.

Home builders, which had been soaring thanks to ultra-low mortgage rates, were losers, as were renovation stocks. Home Depot – America’s Bunnings – fell -5%.

The S&P500 split the difference with a 1.7% gain. The Russell small cap index closed up 3.7%.

And so the list goes on. While Australia’s tech sector pales into comparison with the 25% odd weighting in the S&P500 (note Afterpay ((APT)) hit a new record high yesterday), our mix of virus winners and losers is otherwise consistent. That will inform today’s trade.

Our futures are up 169 this morning.

How did Wall Street respond to the Biden victory? We’ll never know.

Will we now go back to normal? Not a chance. Wall Street has priced in at least six months ahead. FDA emergency approval is expected as early as next week for the vaccine, but as to the virus reaching the average Jo, this is not forecast until at least June, assuming this vaccine is approved for universal use.

There are, of course, a lot more candidates, and plenty in trial stages not far behind Pfizer. Pfizer’s drug is not a user friendly one. It requires a double dose, and must be stored and transported at ultra-low temperatures, making the supply chain an arduous one. The company expects to have 50 million doses ready by year’s end, and a billion plus in 2021.

That’s an initial 50 million for the entire planet. How will it be distributed? Draw straws?

Meanwhile the virus rages unabated. The vaccine is not an overnight sensation.

Having held on to a 1200 points gain right up to the last fifteen minutes, the Dow has closed up only 834.

The timing’s rather interesting. If the news had broken a week ago, how might this have affected the election outcome?

The first responders – in this case traders – have responded. From here there will no doubt be a period of reflection and greater analytical scrutiny. But it’s a long road from here to economic recovery; to the time we can say “thank God that’s over”.

November-December is historically a positive time on markets, leading to the old Santa Rally. This year is far from historical. In a couple of weeks Wall Street is disrupted by Thanksgiving, and then here it’s the run into the Christmas holidays.

And still we have the Trump challenge to get through, and Senate run-offs in Georgia that won’t occur until January. If the Democrats win both, that’s a 50-50 house of review.

Yesterday?

Yesterday on the ASX was all about the Biden victory.

The big winners were telcos (+3.3%), materials (+3.2%), tech (2.8%), industrials (2.0%) and consumer discretionary (+2.0%). Only utilities (-0.2%) otherwise failed to join in.

Further analysis of REA Group’s ((REA)) quarterly earnings result had that stock topping the board with a 9.1% gain, having fallen slightly on Friday.

In other individual stock news, the NSW government has put its remaining stake in WestConnex up for sale, and major stakeholder Transurban ((TCL)) is expected to be a shoe-in. It rose 2.1%.

BHP Group ((BHP)) completed its Shenzi transaction and gained 3.5%.

Outside the index, an update from wearable solutions company Catapult ((CAT)) was worth 12.3%.

But today is another day.

Commodities

It was a strong night across the board in metals, except for gold. Risk-on.

If there is any beneficiary of a vaccine, it is oil.

Philip Lowe might have been excited about a 0.6% rebound for the US dollar index (again, risk-on), but no, the Aussie’s up 0.4% at almost US73c.

Today

As noted, whatever Wall Street’s response to the Biden victory was going to be, it’s been lost in translation. Here, however, we booked our response yesterday to the tune of 1.8%.

The SPI Overnight has closed up 169 points or 2.7%, to the S&P’s 1.7%, bearing in mind the S&P was up 2.7% right until the death.

The NAB business confidence survey for October is out today – something to wrap your fish’n’chips in.

Incitec Pivot ((IPL)) and James Hardie ((JHX)) post earnings reports.

Link Administration ((LNK)) hosts an investor day.

There are a handful of AGMs, including those of Domain Group ((DHG)) and Sims ((SGM)).

The Australian share market over the past thirty days…