A scan of headlines that include the keyword “vaccine” on Monday produced a smorgasbord of feel-good soundbites and quotables.
News of ostensibly positive interim Phase 1 results from Moderna gave US equities an additional reason to start the new week on a sugar high.
“These interim Phase 1 data, while early, demonstrate that vaccination with mRNA-1273 elicits an immune response of the magnitude caused by natural infection starting with a dose as low as 25 µg”, Tal Zaks, the company’s Chief Medical Officer said, in a press release. “When combined with the success in preventing viral replication in the lungs of a pre-clinical challenge model at a dose that elicited similar levels of neutralizing antibodies, these data substantiate our belief that mRNA-1273 has the potential to prevent COVID-19 disease and advance our ability to select a dose for pivotal trials”.
The study is being led by the National Institute of Allergy and Infectious Diseases.
Meanwhile, Xi made a video appearance at the World Health Assembly and pledged $2 billion over two years to assist countries affected by the virus, with an emphasis on emerging markets. A Chinese vaccine, he said, will be a global public good.
All of this is bullish for equities which were already demonstrating a predisposition to kick off the new week with a bang. Surging oil (on the back of headlines around a rebound in Chinese demand) provided an extra boost.
“In the meantime, a scan of US Equities futures positioning shows that both Asset Managers and Leveraged Funds continued to sell or be short/very hedged into the Equities move MTD”, Nomura’s Charlie McElligott said Monday. “Critically then, as a source of potential ‘squeeze pivot,’ we see that over the past one-week reporting period, Asset Managers BOUGHT +$6.4 billion of US Equities futures, which is a 96th %ile 1-week outcome since 2006”.
The Long/Short crowd’s beta to US equities is in just 3.1%ile going back to 2004.
Of course, one could plausibly point to Jerome Powell’s remarks about limitless Fed “ammo” as the oxygen for the blazingly bullish equity conflagration that materialized early in the new week.
If optimism around a vaccine and oil demand gave investors a sugar high, the promise of more Fed support provided a familiar opioid euphoria.
While briefly recapping Powell’s “60 Minutes” interview (the full transcript is here), McElligott says the following:
Personally, my favorite exchange from the interview—as the Fed Chair does his best Nigel Tufnel and smashes that “MONEY PRINTER GO BRRRRRRRR TO 11” button:
- Scott Pelley: Fair to say you simply flooded the system with money?
- Jerome Powell: Yes. We did. That’s another way to think about it. We did.
- Scott Pelley: Where does it come from? Do you just print it?
- Jerome Powell: We print it digitally.
Suffice to say that was financial Twitter’s “favorite” exchange as well, although given some of the caustic replies, “favorite” might be something of a misnomer.
There you go, folks.
Powell to CBS: "There is NO LIMIT to what we can do under these emergency powers."
CBS: "Where does the money come from?"
Powell: "We print it digitally."
— Heisenberg Report (@heisenbergrpt) May 17, 2020
Summarizing, McElligott makes a similar point to something I suggested in the second linked post above – namely that the setup is in place for a reversal of the recent under-the-hood trend in equities.
If the Chinese oil demand story gets any traction, proves durable, or is borne out by other countries exiting lockdowns, it could feed into inflation expectations, bear steepen curves, and help bolster cyclicals and other names that have lagged secular growth stocks in the latter stages of the bounce off the March lows.
“Thematically within US Equities today, we should see a very ‘pro-cyclical’ risk rally, with the ‘Value/High Beta over Growth/Defensives’ ANTI-MOMENTUM trade”, Charlie says, noting that an accelerant would be any bear steepening in US rates.
Clearly, that would mark a “profound reversal” (as he puts it) of the trend.
Both YTD and in May, the tried and true “slow-flation” trades have outperformed on the back of recession worries, falling yields, and a demonstrable preference for anything that can generate growth during an economic downturn. Hence the almost laughable disparity between tech and pretty much everything else.
The assumption was (and still is, really) that the trend illustrated in those simple visuals will persist over the summer, but Monday’s trio of headlines (vaccine hope, oil demand optimism and the idea that the Fed will do whatever it takes to avert a situation where the US succumbs to a protracted slump) are a recipe for a regime shift, even as the current monetary policy backdrop doesn’t exactly scream “buy banks”.
Finally, I would simply note that it wasn’t hard to see Powell’s comments to “60 Minutes” coming.
Same Scott Pelley, same messaging, just a different year and a different Fed chair…
So you know the bear case.
— Heisenberg Report (@heisenbergrpt) May 13, 2020