Monday's global stock rally unleashed by a 2nd round of covid vaccine hopes this time courtesy of Moderna, and which pushed the Dow and all major indexes to new record highs, fizzled on Tuesday as investors shifted focus back to the accelerated near-term spread of the virus and the creeping shutdowns which are certain to hammer the US economy. S&P futures dropped 0.5% or 20 points as New Jersey, California and Iowa imposed fresh restrictions as the number of new US cases hit a record, and threatened to worsen as the colder weather sets in. Nasdaq 100 futures were boosted by yet another reversal in the reflation trade, as well as a jump in Tesla on the prospect of the electric-car maker’s shares joining the S&P 500.

Curiously, the same 3,600 "gamma wall" level which we warned yesterday would complicate a major push higher in the S&P ahead of op-ex, is now serving as a buffer to the downside, and will limit losses. Sure enough, the Emini session low so far today has been... 3,600.

S&P 500 futures slid a day after the underlying benchmark closed at an all-time high on news that Moderna’s vaccine was shown to be 94.5% effective. Drug retailers such as Walgreens Boots Alliance tumbled 10%, while CVS Health Corp fell 6.4% after Amazon launched an online pharmacy for delivering prescription medications in the U.S.

"We might be transitioning from a defensive bull market to a more cyclically offensive one but more clarity is required in terms of when social mobility will normalize,” said Chris Iggo, chief investment officer of core investments at Axa Investment Managers. "The euphoria created by the presidential election result and the vaccine announcement will give way to a more sober analysis of how long and smooth the road to recovery will be."

Not everything was red: Tesla soared 12.4% premarket in anticipation of a $51 billion trade by index funds adjusting their holdings when the company is added to the benchmark S&P 500 in December. At $400 billion, Tesla’s market capitalization is a hundred times that of the S&P’s smaller companies, according to Refinitiv data, making it the biggest ever addition to the index.

In Europe, the Stoxx 600 Index slipped 0.4% by 7:45 am ET, following a sharp drop to session lows just after 6am, with travel shares and banks leading the decline. S&P 500 futures pointed to a small drop at the open, the 10-year Treasury yield was at 0.895%, oil held over $41 a barrel and gold was broadly unchanged.

Earlier in the session, MSCI Asia Pacific Index added 0.2% led by the finance and energy sectors, while Japan's Topix index closed 0.2% higher. Most Asian markets were up, with Singapore's Straits Times Index advancing 1.1% and Indonesia's Jakarta Composite rising 0.6%, although China's Shanghai Composite slid 0.2%. Trading volume for MSCI Asia Pacific Index members was 15% above the monthly average for this time of the day. The Topix added 0.2%, with MUFG and Tokio Marine contributing the most to the move. The Shanghai Composite Index retreated 0.2%, driven by Kweichow Moutai.

In FX, the pound led gains among G-10 currencies on optimism of a Brexit breakthrough, rising for a third day, followed by the Swiss franc and Japanese yen. The Bloomberg Dollar Spot Index fell for a third consecutive session, to touch more than a one-week low, as the greenback fell against almost all Group-of-10 peers; the euro advanced after briefly dipping below $1.1850. Yield curves in Australia and New Zealand bear steepened amid speculation that funds may be shifting from these markets to Treasuries. China’s yuan strengthened to the highest level since June 2018, fueled by optimism over the country’s economic recovery and its interest-rate premium over the rest of the world.

In rates, Treasury futures held small gains as the U.S. trading day began after erasing earlier declines, leaving yields richer by about 2bp at long end of the curve. Yields were little changed at front end of the curve, flattening 2s10s, and 5s30s by 1bp-2bp; 10-year around 0.89% is richer by 1.8bp, outperforming bunds and gilts by 1bp to 1.5bp. The rates market is underpinned by weakness in S&P 500 futures following Monday’s equity rally. Deal flow is in focus with Saudi Aramco setting initial spread guidance on a five-tranche jumbo bond sale.

In commodities, WTI crude oil hovered around $41 a barrel. Gold was modestly higher, trading at $1,889/oz last.

On today's calendar, data highlights include October’s retail sales, industrial production and capacity utilisation, as well as the NAHB housing market index for November. Earnings releases include Walmart and Home Depot. Fed Chair Jerome Powell speaks while four regional Fed presidents take part in a virtual conference on racism and the economy. The Senate will hold a procedural vote on Fed nominee Judy Shelton. September TIC flow data is released at 4:00 p.m. The OPEC+ joint ministerial monitoring committee meets, and Facebook Inc. and Twitter Inc. CEOs testify before the Senate. We’ll hear from a number of central bank speakers including ECB President Lagarde, BoE Governor Bailey and Deputy Governor Ramsden, and the Fed’s Bostic, Daly, Kashkari, Rosengren and Barkin.

Market Snapshot

• S&P 500 futures down 0.4% to 3,609.00
• Stoxx Europe 600 down 0.05% to 389.55
• MXAP up 0.2% to 188.08
• MXAPJ up 0.05% to 620.99
• Nikkei up 0.4% to 26,014.62
• Topix up 0.2% to 1,734.66
• Hang Seng Index up 0.1% to 26,415.09
• Shanghai Composite down 0.2% to 3,339.90
• Sensex up 0.7% to 43,946.93
• Australia S&P/ASX 200 up 0.2% to 6,498.21
• Kospi down 0.2% to 2,539.15
• German 10Y yield fell 0.4 bps to -0.549%
• Euro up 0.1% to $1.1868
• Brent futures up 0.7% to $44.12/bbl
• Italian 10Y yield fell 1.3 bps to 0.541%
• Spanish 10Y yield fell 0.8 bps to 0.091%
• Brent futures little changed at $43.82/bbl
• Gold spot up 0.2% to $1,891.94
• U.S. Dollar Index down 0.2% to 92.42

Top Overnight News from Bloomberg

• French bars and restaurants will remain closed until mid-January as the government tries to stem the resurgent coronavirus outbreak, France Info radio reported, as officials weigh when to allow shops to reopen
• The OPEC+ oil alliance should consider delaying its planned output boost by between three and six months, a technical panel that advises ministers suggested
• Currency markets are back in the spotlight for investors punting on the global economic outlook after the pandemic. Given the progress in developing an effective coronavirus vaccine, risk appetite is making a strong comeback. It’s driving trade-sensitive currencies such as the Australian dollar toward fresh highs, while havens like the Japanese yen and the Swiss franc are feeling the heat
• U.K.’s chief Brexit negotiator David Frost told Prime Minister Boris Johnson to expect a trade deal with the EU as soon as Tuesday, The Sun reports, without attribution
• Boris Johnson should consider “strengthening” regional coronavirus restrictions after England exits its second national lockdown next month, a senior government medical adviser said
• Singapore Prime Minister Lee Hsien Loong said U.S. President-elect Joe Biden should seek constructive ties with China following “quite a tumultuous ride” over the past four years
• Chinese Vice President Wang Qishan called for global solidarity and a shift away from protectionism as his nation prepares for a Biden administration
• Federal Reserve Vice Chairman Richard Clarida said prospects for the economic recovery were brightening due to progress in the development of vaccines to fight the Covid-19 pandemic
• RBA’s November meeting minutes showed that the central bank decided to inject further monetary stimulus into the economy as it became clear that unemployment would stay high and inflation remain subdued for an extended period

A quick look at Global markets courtesy of NewsSquawk

Asian equity markets were somewhat indecisive and only mildly benefitted from the performance on Wall St where both the S&P 500 and DJIA posted record levels and cyclicals outperformed on vaccine optimism following the encouraging update regarding Moderna's Phase 3 vaccine trial. ASX 200 (+0.2%) and Nikkei 225 (+0.4%) were both lifted at the open as energy and financials resumed the cyclical-led surge in Australia, while the Japanese benchmark rallied to above the 26k level to print its highest since May 1991 but then reversed course and briefly gave back all its gains as risk appetite waned. Elsewhere, the Hang Seng (+0.1%) and Shanghai Comp. (-0.2%) were mixed with underperformance in the mainland following a liquidity drain by the PBoC and as US-China tensions lingered with China’s Global Times Editor recently warning that China will ignore some of the Trump administration's political stunts but will resolutely hit back for attacks that might cause real harm, while it was also reported that Huawei is to sell its Honor brand to ensure its survival amid the US crackdown. Finally, 10yr JGBs were flat amid the tentative gains in stocks but with downside stemmed after recently finding support at the 152.00 level, while the BoJ’s presence in the market for over JPY 1.3tln of JGBs with 1yr-10yr maturities did little to spur prices.

Top Asian News

• Courier Giant SF Express Is Said to Mull Share Sale in Hong Kong
• DBS to Allow Employees to Work Remotely for up to 40% of Time
• Philippine Central Bank Reduces Government Bond Purchases
• Southeast Asia’s Virus Hotspot Counts on Early Vaccine Rollout

European equities have kicked the session off with marginal losses (Eurostoxx 50 -0.5%) as markets take a breather from yesterday’s Moderna-inspired gains with little in the way of incremental newsflow since Monday’s close. Sectors are mostly lower on the session with cyclicals such as oil & gas, banks and travel & leisure lagging peers. The latter has been dragged lower easyJet (-2.4%) after the Co. posted a FY loss of GBP 1.27bln and noted that it is expecting to fly no more than 20% of planned capacity in Q1 2021. For banking names, besides the broader thematic moves at play this morning, BBVA (-4.6%) are a standout underperformer after noting it is in merger talks with Sabadell (+6.4%), accordingly, the IBEX 35 (-1.3%), of which BBVA accounts for 7.6% in weighting terms, is trailing its peers. Elsewhere, early strength in European tech names has somewhat abated with the sector roughly unchanged on the session, however, stateside the e-mini Nasdaq 100 (+0.2%) outperforms peers (e-mini S&P -0.5%, e-mini Russell 2000 -0.7%) as the ongoing rotation into cyclical/value companies pauses for breath. Tesla (+12% pre-market) are likely exerting some influence on this front with shares set to open firmer amid news that the Co. is set to join the S&P 500 prior to the open on December 21st. Corporate updates from Europe have been on the lighter side this morning as earnings season draws to a close with the one of the main standouts for the session being Imperial Brands (+6.1%) with shares higher post FY earnings and outlining a more upbeat outlook for 2021.

Top European News

• Italy’s Government Signs Off on 38 Billion-Euro Aid Package
• France’s Bars, Restaurants May Stay Closed Until Mid- January
• Pound Seen Falling 5% if U.K. Trade Talks With EU Go Nowhere
• Merkel Sees German Recovery Accelerating Once Virus Is Tamed

In FX, the Yen is leading the G10 charge against the Buck and having another look at offers ahead of the 104.00 level after tripping stops around 104.34 according to market contacts, but YUAN gains are even more pronounced as the Cnh and Cny extend their rallies towards 6.5450 and 6.5500 respectively from another solid PBoC platform overnight. Elsewhere, the Franc has rebounded further to retest 0.9100 despite further physical and verbal intervention from the SNB and Euro has also shrugged off latest ECB qualms about moves vs the Greenback to clear 1.1850 on the way to circa 1.1875. However, Eur/Usd may yet be drawn to a hefty option expiry at the half round number (2.1 bn) if not decent interest at 1.1830 (1 bn) and a more concerted attempt to reach 1.1900 could be repelled by expiries at the strike (1.1 bn). Meanwhile, the Aussie appears to have taken RBA minutes in stride given no additional policy guidance from last week’s post-meeting statement, but Aud/Usd has piggy-backed the Renminbi and gleaned traction on the 0.7300 handle from closer ties between Japan and Australia to compensate for ongoing strains with China. Similarly, Sterling is deriving momentum above 1.3200 and through 0.9000 in Eur/Gbp terms on positive sounding Brexit reports in the UK media, with chief negotiator Frost briefing PM Johnson about a potential deal by next Tuesday and an EU diplomat suggesting a willingness to be creative in finding a deal to avoid an accidental no deal scenario.

• DXY/CAD/NZD - Given all the advances noted above, the Dollar index is holding up relatively well, albeit in a lower 92.614-372 range compared to Monday awaiting some top tier US data in the form of retail sales and ip before another raft of Fed speakers. Moreover, the Greenback has clawed back some lost ground against the Loonie and Kiwi amidst a dip in broad risk sentiment following yesterday’s Moderna vaccine boost, with Usd/Cad straddling 1.3075 and Nzd/Usd pivoting 0.6900 in the run up to Canadian housing starts and wholesale trade and NZ PPI.
• SCANDI/EM - The Norwegian Korona is keeping pace with the Euro in wake of encouraging GDP updates rather than a deterioration in consumer sentiment, but other oil and commodity currencies are not coping with crude prices retreating from recent highs or the aforementioned waning risk appetite, as the Turkish Lira and SA Rand look forward to CBRT and SARB rate decisions on Thursday.

In commodities, WTI and Brent have experienced a choppy European morning as participants prepare for today’s JMMC meeting in otherwise relatively quiet price action thus far. Currently, WTI and Brent are pivoting around the U/C mark with a range of USD ~0.50/bbl thus far. The OPEC JMMC gathering is scheduled to commence from around 13:00GMT/08:00EST today. Yesterday’s JTC event concluded that most countries support a 3-month extension of the current cuts according to sources; such a decision would imply a production reduction level of 7.7mln BPD throughout the Q1 and as such would be relatively in-line with the source reports prior to the COVID-19 vaccine updates. Subsequently, Energy Intel has reports that JMMC delegates are said to be looking to recommend an extension of 3-6 months at current quotas. Given these updates attention throughout the session will be on how closely the final JMMC recommendation adheres to these reports and how the Committee intends to address the likely mid-term improvements on the demand front given COVID-19 vaccine updates. While on the supply side Libya’s increasing output is a possible concern particularly as they have intimated they will not comply with OPEC+ quotas until production hits 1.6mln BPD. As a reminder, the JMMC can only make policy recommendations and cannot implement policy changes themselves – with attention on the end-of-month OPEC/OPEC+ gatherings for any such alteration which would require unanimous consent to be passed. Moving to metals, spot gold is relatively unchanged on the session with the metal following and as such exhibiting similar action to the range-bound USD this morning. Currently, the yellow metal is just shy of the USD 1890/oz mark and towards the lower-end of the day’s range. Elsewhere, UBS believes palladium prices will rise to USD 2600/oz in 2021 given vaccine updates, strong China auto sales and a general recovery in global economic activity assisting the metal.

US Event Calendar

• 8:30am: Retail Sales Advance MoM, est. 0.5%, prior 1.9%; Retail Sales Ex Auto MoM, est. 0.6%, prior 1.5%
• 8:30am: Retail Sales Control Group, est. 0.5%, prior 1.4%
• 8:30am: Import Price Index MoM, est. 0.0%, prior 0.3%; Import Price Index YoY, est. -0.75%, prior -1.1%
• 8:30am: Export Price Index MoM, est. 0.2%, prior 0.6%; Export Price Index YoY, prior -1.8%
• 9:15am: Industrial Production MoM, est. 1.0%, prior -0.6%; Capacity Utilization, est. 72.3%, prior 71.5%
• 10am: Business Inventories, est. 0.6%, prior 0.3%
• 10am: NAHB Housing Market Index, est. 85, prior 85
• 4pm: Net Long-term TIC Flows, prior $27.8b;

DB's Jim Reid concludes the overnight wrap

After the last couple of weeks we should be aware that getting lunch early on a Monday could see you miss moves in markets that sometime take years to achieve in normal times. Moderna (11:56am GMT) yesterday followed Pfizer/BioNTech (11:45am GMT) last Monday in releasing the all important efficacy numbers just before the US was arriving at their virtual desks. So let’s see what arrives next Monday morning just before noon GMT.

The impact of yesterday’s announcement wasn’t as big for markets as last week’s though but it continued to fuel the rotation trade. With similar technology to Pfizer/BioNTech, expectations had already been raised for Moderna. However make no mistake that this was very good news. A 94.5% efficacy rate to date puts it up there with the most reliable vaccines we have. Below we have updated a CoTD from last week that has efficacy numbers for both these Covid-19 vaccines so far against diseases that we commonly vaccinate for. They both score very highly especially versus the flu vaccine.

In a further positive development, the Moderna vaccine “only” needs to be transported at minus 20C, which is well above the minus 70C that the Pfizer/BioNTech vaccine seemingly requires, so that’s more promising news when it comes to its wider distribution. In terms of the next steps, Moderna said that they intended to submit for an Emergency Use Authorization with the US FDA “in the coming weeks”. Later on in the day Federal Reserve Vice Chairman Clarida said that the positive vaccine news means he’s “got more conviction in (his) baseline for next year and more conviction that the recovery from the pandemic shock in the U.S. can potentially be much more rapid than it was from the global financial crisis.” So some rare recent signs from a Fed official of upside risks to growth.

Nevertheless, though the vaccine developments were incredibly positive, markets still have a bit of a “show me the logistics” side to it, and are also awaiting further info on availability and whether it’s as good at protecting the most vulnerable - namely the elderly. One of the successes that were highlighted by both the Moderna CEO and Dr Fauci was the ability to protect against severe cases, as no participants who got the vaccine developed a severe case of Covid-19, compared with 11 volunteers who received placebo shots.

Just on that logistics side, Pfizer/ BioNTech has said overnight that it has started a pilot Covid-19 immunisation program in four US states - Rhode Island, Texas, New Mexico, and Tennessee - to help refine the plan for the delivery and deployment of the vaccine.

In the meantime though, case growth continues to move in the wrong direction throughout the world, with governments moving to impose further restrictions. Cases have now risen on a weekly basis in all 50 US states with the Northeast now joining the rest of the nation as the weather turns colder. The New Jersey Governor announced that indoor gatherings would be limited to a maximum of 10, the Michigan’s Governor imposed a partial three-month shutdown, while in Philadelphia indoor dining has been banned and schools closed. California has also reinstituted bans on many indoor businesses and warned that a curfew is possible.

Even in Sweden, which had been relatively relaxed in its restrictions early on in the pandemic, the Prime Minister announced that gatherings of more than 8 people would be banned from next week. Here in the UK, Susan Hopkins, deputy director of Public Health England, said overnight that the three-tier system of social-distancing rules put in place before PM Johnson ordered a four-week lockdown in England was not wholly effective, and a winter of tougher measures may be needed until the vaccine is available for everyone. In more positive news France saw the running 7-day tally of new cases fall for a ninth-consecutive day and the country’s positive-test rate fall to 16.4%, down over 3pts in a week.

As with the Pfizer news the previous week, risk assets responded positively to the vaccine developments, and the S&P 500 climbed +1.16% to reach a new all-time high of 3626.91. That puts the index up +12.26% on a YTD basis, which probably isn’t what you’d have guessed for the S&P at this point had you been told the US economy was going to see its biggest annual contraction in decades. Looking at the sectoral moves, energy stocks (+6.50%) led the advance against the backdrop of a surge in oil prices, which themselves were supported by hopes of stronger economic demand and greater mobility in a post-Covid world. Indeed by the close, both Brent Crude (+2.43%) and WTI (+3.02%) oil prices had witnessed major gains. On the other hand, tech stocks lagged but they also ended the session higher, with the NASDAQ up +0.80%. And the S&P 500 wasn’t the only index to reach an all-time high, with the Dow Jones (+1.60%) climbing to its highest ever closing level, falling just shy of the 30,000 mark. Also on the S&P, there was confirmation that Tesla would be entering the S&P 500 on its next rebalancing on December 21, when it will likely be the largest ever new member and comfortably in the top 10 with its current market cap. The stock was up as much as 15% in after-market trading. This sort of gain is actually more than the market cap of Moderna which is pretty stunning.

Some of the stay-at-home stocks such as Zoom (-1.10%) lagged but the only sector that pulled back in the US was ironically Healthcare (-0.19%) as some businesses that were more profitable during the pandemic were repriced. The losses in the sector were led in part by Pfizer (-3.26%) with the difference in storage temperature between the two vaccines driving part of the divergence as Moderna rallied +9.63%.

For Europe it was much the same story, with the STOXX 600 rising +1.18% to a fresh post-pandemic high as energy stocks led the charge there too. Indices made gains across the continent, with the FTSE 100 (+1.66%), the CAC 40 (+1.70%) and the DAX (+0.47%) all moving higher. Southern Europe in particular outperformed, with Spain’s IBEX 35 (+2.60%) and Italy’s FTSE MIB (+1.98%) seeing the strongest gains on the continent. And this outperformance in southern Europe was also reflected in their sovereign bond spreads, which tightened to their lowest in years in some cases. In fact by the close, the spread of Italian 10yr yields over bunds had fallen -1.6bps to a 2-year low of 1.20%, while the equivalent Greek spread was down -4.1bps to 1.263%, its tightest level in over a decade.

Overnight in Asia the rally in risk assets has stalled a little with the Nikkei (+0.44%), Hang Seng (+0.02%), Kospi (+0.09%) and Asx (+0.21%) all making quite modest gains. The Shanghai Comp (-0.30%) is down. However, the rotation trade is continuing in Asian markets towards cyclicals. Meanwhile, futures on the S&P 500 are down -0.43% overnight. European futures are also pointing to a weaker open.

We heard from the ECB Chief Economist Philip Lane overnight as he reaffirmed that the ECB will provide enough monetary stimulus at its next meeting to make sure governments, companies and households have access to cheap credit throughout the coronavirus crisis. He added that, “Our orientation is to keep financing conditions favorable.”

Back to markets and sovereign bonds had a much less rosy time yesterday, selling off in response to the positive vaccine news as investors viewed it as lowering the likelihood of prolonged easy monetary policy. Despite the fact that yields had started the day by moving lower, those on 10yr US Treasuries ended up rising +1.0bps to move back above the 0.9% mark, while those on 10yr bunds (+0.2bps) and gilts (+1.1bps) similarly moved higher. They did all rally off the session highs in yield though.

It was somewhat down the headlines given the vaccine news, but there was a blockage in progress on the EU’s long-term budget and recovery fund yesterday, after Hungary and Poland opposed its progress because of conditions attached over the rule-of-law. This poses a risk since there has to be unanimity among the 27 member states for the European Commission to be able to issue joint debt. The bloc’s leaders are going to be holding a video conference on Thursday which is scheduled to focus on their response to the pandemic, so we can expect a strong discussion there. And although Hungary and Poland are against the conditions, others remain strongly in favour.

To the day ahead now, and we’ll hear from a number of central bank speakers including ECB President Lagarde, BoE Governor Bailey and Deputy Governor Ramsden, and the Fed’s Bostic, Daly, Kashkari, Rosengren and Barkin. Data highlights from the US include October’s retail sales, industrial production and capacity utilisation, as well as the NAHB housing market index for November. Finally, earnings releases include Walmart and Home Depot.