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Vaccine success has given investors their bull case

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Markets and investors finally can see a vaccine light at the end of the pandemic tunnel.

Global market sentiment was already buoyant in the wake of the confirmation of Joe Biden’s victory in the US presidential election over the weekend. But the big story for markets and investors is now the breakthrough on a Covid-19 vaccine

News that the vaccine being developed by Pfizer and Germany’s BioNTech has been found to be more than 90 per cent effective in late-stage trials has caused dramatic shifts across financial markets.

Much, of course, remains to determined on the timing and deployment of a vaccine. But it is undeniably a moment that has changed the outlook for investors and society, particularly given that pharma companies believe it could arrive before the end of the year.

Ajay Rajadhyaksha, head of macro research at Barclays said should a 90 per cent efficiency rate prove correct, it “increases the odds of a quicker return to normalcy”.

Robin Winkler, director of FX strategy at Deutsche Bank, added that many countries “have pre-ordered a significant number of doses” to speed access to a successful and approved vaccine. “In per-capita terms, the US, the EU, Canada, Japan, the UK, Australia and New Zealand have all pre-ordered enough doses to take a major step toward herd immunity early next year,” he said.

This potentially sets the stage for a broader economic recovery in 2021 that, in the near term, will be supported by the current stimulus of governments and central banks. Crucially, the post-pandemic recovery will be accompanied by the release of pent-up demand from consumers who have been amassing savings.

Also looming is the likelihood of a big investor shift out of low-yielding bonds and cash. That in turn provides a lot of dry powder for sustaining share market gains and sets the stage for a healthier shift in leadership within equity markets.

Surging global share markets on Monday were being propelled by companies that stand to benefit the most from a stronger post-pandemic economy.

Tech and other “stay-at-home” stocks that benefited from the digital acceleration of society during lockdowns are now being left behind. A rise of nearly 4 per cent for US small stocks contrasted with a 1.5 per cent slide in the tech-focused Nasdaq Composite. Across Wall Street and Europe, equity sectors hit hardest by lockdowns are enjoying quite a rebound.

“All the stocks that were badly sold off this year are now among the biggest risers of the day, as investors assume the vaccine will be deployed successfully and there is now a greater chance of earnings recovery in the short to medium term,” said Russ Mould, investment director at AJ Bell.

This so-called global reflation trade also resonates in the form of stronger commodities, with oil prices rising sharply on Monday. Emerging market currencies are also gaining steam, while the US dollar and precious metals are losing more of their haven lustre.

The other key development for financial markets is a sharp rise in the 10-year US Treasury yield, with this important global benchmark heading above 0.90 per cent. Deployment of a vaccine that triggers a sustained economic recovery means higher bond market interest rates. That could propel the US 10-year yield back towards 1.5 per cent, the level that prevailed before the pandemic arrived.

Rather than fear higher interest rates, investors should view them as another step on the road towards an eventual recovery and a positive driver of the reflation trade. Financials are an important sector of the share market and higher interest rates will bolster these groups’ profitability. As interest rates rise, the difference between what banks charge borrowers and what banks pay for funding widens.

A sustained rally in financials in global terms favours share markets in Australia and the UK, according to Robert Buckland and the equity strategy team at Citi. “These are the two major markets with most exposure to sectors that outperform when nominal yields are rising. They are heavily weighted towards financials. The US is heavily exposed to tech stocks, and may lag any vaccine-driven rally,” he said.

The scars from the pandemic will take a long time to heal but the rationale for investor optimism is sound.

Until last week, the best-case hopes for investors were based on further government spending and central banks keeping interest rates stuck at ultra-low levels for an indefinite period.

Now, science stands to shift investors from crowding into tech shares and low-yielding bonds and focus on a broader range of opportunities across financial markets that will benefit from a full restoration of economic activity in 2021. Investors have their bull case thanks to a vaccine.

michael.mackenzie@ft.com



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Markets

Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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