Stocks have rallied on news that we could soon have an effective vaccine against Covid-19. Initial optimism is exceedingly high and could fade – we should not be jumping any guns here – but ultimately a vaccine that works effectively would be good for the economy and favours the cyclical parts of the market that we thought were going to struggle as a split Congress meant less stimulus.
Rolls Royce [LON:RR] and Carnival Plc [LON:CCL] were leading stocks as the US market opened this after. The Dow Jones index was signalled to open more than 1600 points this morning, on the back of the election result over the weekend and the news from Pfizer on its vaccine this morning. Rolls Royce shares were up more than 44% at lunchtime, with Carnival not far behind, at +30.24%.
Other key market leaders included International Consolidated Airlines [LON:IAG] and EasyJet [LON:EZJ], while much-shorted Hammerson [LON:HMSO] was also up over 30%.
“A working vaccine is positive for cyclicals and value – the reopening trade essentially,” observed Neil Wilson Chief Market Analyst at Markets.com, “The dichotomy in the market is stark: the biggest gainers in a frantic session today are among those stocks worst hit by the pandemic – travel and leisure chiefly, whilst Covid winners are doing poorly. We should be careful in overreacting – but it’s clear the market is forward looking and pricing in recovery in a number of beaten-down areas next year.”
Big questions remain unanswered
Several questions remain, which won’t be answered right away.
When does the vaccine get rolled out fully? So how quickly are we ‘back to normal’ effectively? The UK has pre-ordered 30m doses of the vaccine, but what about other countries?
“The vaccine development reports are, obviously, an important step in the right direction,” said Nigel Green, CEO of deVere Group. “However, I suspect the markets – which are already in bullish mood due to the incoming Biden administration – are overthinking the positive vaccine news. They are being premature in their buoyancy. There’s a long road ahead still.”
Given the US election result, does this make it harder to agree stimulus that is required now for the economy?
If this is a higher yield, higher inflation world, how does the Fed start to adjust? Will it even consider thinking about thinking about raising rates? Lots of Fed speakers this week to frantically rewrite their speeches.
Some stocks which have done very well over the COVID period were in the red on Monday afternoon, among them grocery delivery star Ocado [LON:OCDO] which saw its shares plunge over 10%, Fresnillo [LON:FRES] and Kingfisher [LON:KGF] shares were also sold off, along with Reckitt Benckiser [LON:RB].
Wilson at Markets.com said that US Treasuries were being offered with the 10 year yield spiking north of 0.92%. He added that inflation could still come through in 2021, with large excess savings to be deployed in many sectors of the economy, notably in travel. Higher yields were weighing on gold prices this afternoon, although inflation expectations are anticipated to rise in the next few months and this could offer ongoing support to precious metal prices.