The Power Of Positive Thinking

All anyone cared about on Monday was Pfizer’s stunning vaccine news.

Invariably, you’ll hear a chorus of warnings that reflation winners ran (way) too far, (way) too fast, but such voices mattered little in the heat of the moment.

Russell 2000 futures came into the cash session limit-up. By Monday afternoon, the small-cap ETF had outperformed QQQ by one of the widest margins in two decades.

What you see in the figure (above) is a session for the history books. Monday was among the best days for the small-cap product versus the Nasdaq 100 ETF ever.

The reversal shocks across factors were dramatic. “The five-year plus placeholder that was long secular growth (bond proxies), short cyclical value (economically sensitives) was in flames,” Nomura’s Charlie McElligott said. “My Equities L/S model is -380bps today, which would be the third-worst day over the prior one-year period,” he added.

As former head of equity derivatives at RBC Dominion, Kevin Muir, put it, “market participants are well offsides [and] whenever you get market players hurting this much, crazy stuff happens.”

In the rates space, you know the story: Bonds were a bloodbath. The long-end was cheaper by as much as 15bp, the biggest selloff since March. As Bloomberg’s Edward Bolingbroke observed, “hawkish sentiment was evident [in eurodollar options] as flows emerged in mid-curve [puts] and steepeners were active.”

“The sharp Treasury selloff didn’t occur until the Pfizer headlines hit and the market contemplated the ramifications resulting from a vaccine that might be 90% effective,” BMO’s US rates team said late Monday, adding that “the most significant takeaway was that financial markets are far more influenced by the path of the pandemic than anything on the political front.”

That will continue to be the case as long as Donald Trump doesn’t do anything totally bizarre and/or Democrats don’t manage to win both runoffs for Georgia’s Senate seats. Those two tail risks are worth keeping on your radar.

Trump doesn’t appear likely to concede the election and he “terminated” Defense Secretary Mark Esper on Monday. Esper’s exit was expected, but I would gingerly remind you that one of Esper’s “mistakes” (in Trump’s eyes) was explicitly refusing to countenance the idea of deploying active duty US military troops against US citizens over the summer.

As for the Georgia runoffs, they’re a big deal. Democrats almost surely won’t prevail, but if they did, the “blue sweep” would be a reality. And suddenly, big stimulus would be back in the cards, alongside a more redistributive tax regime.

Oil rose nearly 9% on Monday, as a highly effective vaccine offered a concrete fundamental catalyst, while OPEC+ debates next steps to keep the market supported.

“This changes everything on the demand side,” one energy equity analyst at CFRA told Bloomberg.

President-elect Biden warned that America faces a “dark winter” even as dawn came on the vaccine front. “There’s a need for bold action to fight this pandemic,” he said Monday, after chatting with his new coronavirus panel. Biden is now giving his own coronavirus briefings, against a backdrop that reads “Office of the President Elect.”

“It doesn’t matter your party. It doesn’t matter who you voted for,” Biden insisted. “We can save tens of thousands of lives if everyone would just wear a mask.”

While Biden is prone to adopting a positive outlook, he also tends to come across as incredulous at Americans’ demonstrable reluctance to take even the simplest of steps to save each other’s lives.

Ben Carson became the latest character from Trumplandia to test positive for COVID. His diagnosis comes just days after Mark Meadows contracted the virus.

Before long, it’ll be easier to list the Trump associates who haven’t had COVID than to remember all of the ones who have. Believe it or not, even the man advising Trump on his hopeless post-election legal challenge has COVID. David Bossie tested positive on Sunday.

Almost every haven asset you could name fell Monday. Gold plunged, for example, while the yen and the Swiss franc sold off as well. The Turkish lira got some much needed respite, surging 5% against the dollar after a chaotic weekend.

How sustainable any of this is — from the pro-cyclical rotation in equities all the way to the reversal of fortune for the lira — is already the subject of considerable debate.

Any economic boost from a vaccine is still months (at least) away, and any further rise in US hospitalizations could (and I emphasize “could”) prompt local officials to consider modified lockdowns in order to avoid straining overburdened health care systems.

I’ll leave you with one final chart…