Global Equities in favour from Vaccine – Could this last?

Moderna’s announcement that its vaccine is 94.5% effective in preventing the coronavirus and that it can be stored at standard refrigerator temperatures for one month added to investor optimism that there could be light at the end of the tunnel. Moderna shares surged 16% yesterday. Moderna’s vaccine further reduces the uncertainty around the medium term domestic and global growth outlook, boosting the chances for a return to “normal” in 2021 or 2022.

However, as with the Pfizer vaccine news last week, the logistical challenge of manufacturing and distribution remains an unknown, which could again make for choppy trading for the rest of the week. According to Citigroup’s head of rates strategy Jabaz Mathai, the likely impact on the $20tn market for US government debt is and will continue be an “unambiguously bearish” development for Treasuries.

The Fed “may have a higher tolerance for higher yields if the stock market and credit markets continue to be strong”, he added. A sharp rise in Treasury yields coupled with a significant pick-up in broader market volatility and a deteriorating economic backdrop, however, could prompt more immediate action.

Line chart folks 10-year yield (per cent) showing treasury yield leaps following vaccine news

Currently it seems that global markets are mixed as they assess recent developments on possible vaccines against rising virus cases and tightening restrictions, which is clouding the near term outlook .

So far today, we have seen profit taking at record highs on the broader US indexes weighing on the USA30 and USA500 futures which are -1.06% and -0.90% lower, while the USA100 is the least affected as it holds slight gains, dragged by the Tesla shares jump on the announcement that the company will join the S&P index on December 21. USA30 meanwhile drifted lower amid the drug store stocks sell off, with Walgreens Boots Alliance and Home Depot collapsing the most after Amazon launched a pharmacy and home drug delivery unit on its new online Amazon Pharmacy store. Walgreens Boots Alliance shares collapsed more than 9%, and Home Depot shares dropped 2.5%, despite a third-quarter report delivering sales and earnings growth that was well above forecasts.

Meanwhile, in the long term, with the likelihood of an end to the pandemic crisis as even more vaccines are likely to come out soon, we might see a shift in the markets into value stocks rather than the so far  fast-growing stocks, such as in US technology. Shares in economically sensitive industries have been hurt the last 10 years due to stagnant economic growth with investors moving to the fast growing stocks such as Tesla, Amazon,  Apple etc.

Generally speaking, stocks that trade for valuations below that of the average stock in the S&P 500 are considered value stocks, while stocks with above-average growth rates are considered growth stocks. For example, McCormick (NYSE) is a value stock, while fast-moving Tesla (NASDAQ) is an obvious example of a growth stock.

Citi’s chief US equity strategist Tobias Levkovich said that last week was a turning point, listing a host of reasons why he thought the growth-to-value rotation would gather steam: the likelihood of more vaccines coming out soon; corporate earnings improving next year; faster growth, quicker inflation and rising bond yields; and the sheer extent of Big Tech’s current dominance — something that has historically never lasted.

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Andria Pichidi

Market Analyst

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