Nomura’s McElligott On Vaccine News: ‘The Reflation, Reopening, Relief’ Trade Will Be ‘Insane’

News that Pfizer’s COVID-19 vaccine has an efficacy rate above 90% rippled across asset classes on Monday.

Now, markets will prepare for what could be a dramatic reversal of the under-the-hood price action in equities that characterized the post-election rally.

Recall that expectations for divided government under a Joe Biden presidency ushered in a return of tech outperformance and catalyzed a powerful bout of bull flattening in the curve. The idea, in brief, was that a Republican Senate would serve as a firewall against tax hikes and re-regulation, while also capping the size of the next stimulus bill.

On balance, it was bullish for equities, as is the prospect of a more predictable White House, but it disappointed those who had positioned for a “blue wave” trade through steepeners and cyclical value in stocks.

But, by Friday, analysts were talking up a possible revival for pro-cyclical trades as a pair of Georgia runoffs set for January means there’s still an outside chance for Democrats to flip the Senate while expected positive news on the vaccine front had the potential to change the macro game.

“We expect an end in sight for the COVID-19 pandemic,” JPMorgan’s Marko Kolanovic wrote. He cited the “imminent arrival of positive vaccine news,” noting that a breakthrough could come within “days” and it could “drive long-term value outperformance.”

Fast forward 72 hours and it looks as though markets are set to witness epic dispersion.

“Even prior to this morning’s incredible Pfizer vaccine trial 90% efficacy headlines, front implied vol compression was already raging unabated… with post-election ‘worst case scenario’ hedges/ tails being vomited,” Nomura’s Charlie McElligott said Monday.

“For the masses, the challenge is going to be about DISPERSION, because the 5+ year legacy crowded positioning of the ‘everything duration,’ goldilocks momentum trade is likely going to see tectonic movement,” he added, noting that “at the very least,” the duration infatuation in rates and all of the equities expressions tethered to it, are now staring at a “tactical unwind” as market participants “play for this ‘economic reopening’ forward view.”

European equities were ebullient on the Pfizer news. The CAC 40, for example, jumped an astounding 7.5%. German stocks were up 5%.

The “problem” (if that’s the right word) is that we’ll now get a test of whether the market can, in fact, rise with mega-cap tech and other secular growth favorites underperforming.

That’s no small matter. There have long been questions about the viability of any “baton passing,” so to speak, when concentration is so high (e.g, FAAMG comprising ~25% of the S&P 500).

As McElligott went on to say Monday, those winners will likely be a source of funds as investors pivot. “The ‘new’ trade for Retail is now back towards renormalization trades most likely, with secular growth as the probable source of funds,” he said, before noting that this “will be an ‘everything up’ trade when all’s said-and-done.”

By the end of Monday, there will surely be a bevy of eye-popping value over growth visuals.

As ever, McElligott captures it best. “Now with the full-throttle ‘economic reopening’ joy following the vaccine headlines and the still-present risk of a ‘blue wave’ dynamic still a low-delta ‘thing’ due to [the] Georgia runoff potentials, the ‘Rotation Reflation Reopening Relief’ trade will be insane today,” he said, noting that now, with the vaccine news, the rationale for that trade is “far, far better than just the ‘unlimited government spending’ thesis.”