The Market Today
Vaccine Optimism Boosts Sentiment but Concerns Remain
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: As discussed yesterday, Monday’s big news was the announcement that initial analysis of Pfizer and BioNTech’s vaccine from a phase 3 trial showed the shot appeared to be safe and blocked the virus 90% of the time. The news helped soften some of the concerns cited by the Fed in its latest financial stability report that a delayed vaccine process could “derail” the recovery and cause a big decline in asset prices. However, world leaders cautioned citizens against letting their guards down too quickly. California’s governor said he’s concerned that residents could become overconfident in a vaccine that is still months away. U.K. Prime Minister Johnson echoed that sentiment, saying we’re “some ways off” from being able to rely on a vaccine. One of Johnson’s top medical officials said it would be a “colossal mistake” for people to relax the measures they are taking to protect themselves. The news of a possible vaccine may also make stimulus negotiations in the U.S. more difficult considering the quicker economic recovery that such a medical breakthrough could produce. Senate Majority Leader McConnell said Congress should move forward with smaller, more-targeted aid, an idea that was dismissed by top leaders in the Democratic party. The U.S. Chamber of Commerce urged Congress to take some action before year-end to shore up the economic recovery.
October Small Business Confidence Remains High but Uncertainty about Election and Government Response to COVID-19: Small business optimism remained unchanged at 104.0 in October. The details of the report were mixed with 5-point declines in both those expecting to hire over the next three months and those expecting the economy to improve over the next six months. However, on the positive side, both indices, while declining in October, remain at positive levels. Also positive, the number of respondents expecting sales to improve increased 3 points. According to NFIB Chief Economist Bill Dunkelberg, “Leading up to the presidential election, small businesses continued to focus on stabilizing their businesses but were uncertain about the future economic conditions due to COVID-19 government regulations on all levels.”
Job Openings and Fedspeak: At 9:00 a.m. CT, the September Job Openings and Labor Turnover Survey is expected to show a slight uptick in job openings, up 7k to 6.50 million. There is also a wave of Fedspeak today including Dallas’ Kaplan (7:30 a.m. CT, 9:00 a.m.), Boston’s Rosengren (9:00 a.m., 3:00 p.m.), Atlanta’s Bostic (11:30 a.m.), and Fed Governor Brainard (4:00 p.m.). In addition, Vice Chair Quarles will appear before the Senate Banking Panel at 1:00 p.m.
Big Vaccine News Boosted Market Morale on Monday: Markets were jolted higher ahead of U.S. trading on Monday by an announcement from Pfizer and BioNTech that an interim analysis of their vaccine candidate’s phase 3 trial results showed no major safety concerns and indicated the shot was 90% effective at preventing the coronavirus. While the results must be finalized before the vaccine can move into mass production, hopes that the pandemic could be brought under control soon led to cheerful trading on Wall Street. After gaining 3.9% in the first few minutes of trading to climb above its previous all-time high, however, the S&P 500 rose 1.1% and closed near the lows of the day.
Nonetheless, the sector performances showed the effects of the developments. With oil rallying more than 8% on prospects of improved demand, the energy sector rallied more than 14% to lead all gains. In notable sub-sector moves, airlines surged 14.7% and hotels, resorts, and cruise lines spiked 18.6% on hopes travel will pick-up. Banks rallied more than 13% as Treasury yields shot higher and the curve steepened. On the other end, the tech sector, which led gains during the pandemic, pulled back. The firmer market tone moved longer Treasury yields up to new highs since March, with the 10-year yield adding 10.5 bps to 0.92%, its highest level since March 19. With the Fed expected to keep rates low well into any economic recovery, and in any case until inflation moves back up to 2%, the 2-year yield was more steady, up just 1.8 bps on the day. The spread between the two securities rose to 75 bps, its widest margin since February 2018.
Monday’s Vaccine News Remains Market Focus on Tuesday: Global sovereign yields continued to be pressured higher overnight by Monday’s vaccine news as Asian markets responded positively to the developments (which came after regional markets closed Monday) and Europe’s Stoxx 600 gained another 0.6% at 6:45 a.m. CT. U.S. futures, however, were mixed with Dow contracts up 0.8% as tech continued to languish, dragging Nasdaq futures 1.4% lower. S&P 500 futures were just below even after flipping between gains and losses several times in overnight trading. The effects of yesterday’s news, however, were still evident in the underlying company trends. In addition to tech’s continued weakness, Pfizer’s stock added to sharp Monday gains and some of the worst-hit stocks during the pandemic, such as airline and cruise companies, continued to push higher.
Vaccine Hopes Arrive in the Middle of a Global Virus Surge: The renewed hopes for a medical breakthrough come amid the sharpest surge in global infections to date, one that has stirred new anxieties about the recovery and caused many European governments, including Germany’s, to reimplement activity-reducing partial lockdowns. Data overnight showed a much steeper decline than was expected for German economic expectations for November to its lowest level since April. At 7:30 a.m. CT, the 2-year Treasury yield was 0.8 bps higher at 0.18%, the 5-year yield was up 1.6 bps to 0.44%, and the 10-year yield had added 2.4 bps to 0.95%. An auction of $41 billion in 10-year notes at 12 p.m. CT could create some midday volatility.