Marius Paun | London, UK | Senior dealer | Friday, 20th November 2020
World markets welcomed the news last week that Pfizer and BioNTech announced a vaccine which was reported to be over 90% efficient in preventing coronavirus infection. This week they added that the efficacy rate is over 94% for individuals over 65 years old. Eli Lily said its antibody treatment would become available pretty soon. On top of that Moderna, another contender in the Covid race reported their vaccine showed a 94.5% efficacy rate and can be transported at less harsh temperature conditions (versus Pfizer’s).
It’s easy to understand the significant upside reaction in the majority of asset classes. Value stocks absolutely rocketed, airlines for example jumped upwards of 20%, oil prices gained 10%, bond yields rose as their prices fell. Only Big Tech stocks, in particular, ‘stay at home’ ones such as Zoom, Peloton etc tanked. Last Friday, Dow and S&P 500 closed higher for the week for the second week in a row. In the process, Dow made another fresh all-time record high.
That news looks like a game-changer. The world now has evidence of a viable vaccine (or even a few more) is on its way to save the day. There were plenty of ‘specialists’ saying it can’t be done on such a short time frame, phase three trials can take years. Yet, it appears we don’t have to live with Covid for a long time and keep going in and out of lockdowns on a regular basis.
There were talks of inflation returning. Due to lockdown measures applied on and off for quite a few months, it’s very likely that a significant part of demand was destroyed. Now demand is bound to come back as the economy re-opens gradually sometimes next year. But the supply was hurt as well and possibly it could take longer to adjust. Some industries may not ever recover. The psychological factor tells us we all want to go back to our previous lifestyle, holidays, restaurants, theatres. Possibly we’d want all those fast to make up for lost time this year. What’s that saying about prices when the demand spikes?
Interest rates jumped too as investors will want exposure to risky assets (stocks). If the economy improves who’s going to favour bonds which are already very expensive? If the inflation scenario comes true the Federal Reserve might have to consider raising interest rates faster than previously anticipated. That should be interesting to watch as central banks and governments are thought to prefer inflation to get rid of the ballooning debt. They’d rather be relaxed about inflation rising and at the same time keep rates lower. But could they do that for a long time if inflation spikes? How happy will the savers be and what will be the political price?
The verdict on interest rates is closely linked to the current rotation debate, out of tech and into value. The Tech shares do well when rates are low while with value shares benefit with growth. These companies generate good cash flow, hence paying dividends, but aren’t likely to see big growth. And they reflect all those industries that were battered during Covid lockdown, hospitality, airlines, restaurants etc.
While markets are known to be forward-looking, so the optimism from the vaccine is superseding the concerns, there are some risks on the short term. The obvious one is that rising coronavirus cases casts doubt the economic recovery will be quick. The media has also reported ‘disagreement between the Fed and the US Treasury Department regarding the continuation of some emergency programs that were implemented to address the Covid induced recession’.
Also gaining some traction is the risk of Donald Trumps’ refusal to concede he lost in the Presidential election. The vote counting is over but he alleges fraud without showing evidence so far. The political analysts say courts are rather reluctant to overturn election results. Michigan, Pennsylvania and Nevada all have Democratic governors who would block any attempt to change the electoral law. The problem is the trails by a big margin and mathematically needs to overturn results in at least three states. The problem is that most of the Republicans are still behind Trump and that could make markets jittery especially if the US starts to see widespread riots (so far this has not happened).
The US economic data is rather encouraging though. The Industrial Production came in at a better than expected 1.1% vs views of 1.0%. Manufacturing output outperformed with a 1.0% increase vs. estimates for 0.9%. It continued with a better than anticipated Business Inventories report which showed a rise of 0.7% vs. estimates for 0.5% and the Housing Starts and Permits report which rose 4.9% to 1.530 million units vs. views for 1.460 million.
In the last Report on Dow from September 17th, we said the odds are with the bulls. Indeed, the chart shows the Dow resumed the rally and made a new intraday all-time high last week on November 9th reaching 30,090. The short-term moving averages (red line) crossed back above the long-term MA (blue line) giving us the bullish signal and both are again pointing upwards.
On the upside, the first resistance level could be seen just below 29,500. It already tried to breach that mark this morning but the level held so far. A close above it could build momentum and spur renewed buying with a retest of the record high on the cards as the long-term trend is still pointing upwards.
The flattening of the short-term MA during the last few sessions could indicate that consolidation around the current levels is also a possibility. On the downside 29,195 should act as the first line of support. Bears will also look for a break below the 28,900-28,950 range which acted as good resistance in October now turned support.