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Dow reaches 30,000 as equity euphoria heightens

A combination of positive vaccine news, political certainty regarding the next President, and positive data coming from the United States edged equities to all-time highs.

The Dow Jones is sitting just above that coveted 30,000 level, which makes it up year to date by 4%.  The S&P 500 is up around 11.6% for the year, with the NASDAQ up an impressive 36%.

Dow Jones in Blue, S&P 500 in Orange, NASDAQ in Teal

Equity markets aren't the only markets benefiting from positive sentiment. Oil prices have reached an eight-month high, with Crude and Brent touching $46 and $48 a barrel, respectively.

Vaccine woes pushing markets higher

One of the main factors that help push equities higher was the consistent positive vaccine news in the past couple of weeks. AstraZeneca yesterday stated that its Coronavirus vaccine's large stage trials were "highly effective" in preventing the Coronavirus. Professor Andrew Pollard, the Chief Investigator for the AstraZeneca trial, stated that "[the results] show that we have an effective vaccine that will save many lives. Excitingly that one of our dosing regimes may be around 90% effective." This is after Pfizer and Moderna reporting vaccines that have 95% efficacy.

Political stability also pushing markets higher

Furthermore, there are signs that Trump is starting to accept his defeat for a second term. Markets have interpreted this as a soothing in political volatility. President Donald Trump has stated that it is "in the best interest of the country" to begin the transition to Joe Biden's future government and instructed officials to "do what needs to be done." However, Trump has still not conceded. President-Elect Joe Biden has started to assemble his government, with his latest pick, Janet Yellen, for Treasury Secretary.

Positive PMI's pushing markets higher

Lastly, Manufacturing and Services PMI's were better than expected at 56.7 and 57.7 with a market expectation of 53 and 55.3, respectively.

Investors and Traders will be looking forward to the FOMC minutes for guidance on the Federal Reserve's opinion for the future of the American economy.

Risk on: Oil and Stocks up

Its risk on to the start of the US trading week as promising vaccine results amongst a resurrection in Chinese oil demand send equities and oil soaring.

Brent in blue, SP500 in red, Gold in orange on a daily chart

The SP500 is up near 3% on the back of Moderna, stating that their Coronavirus vaccine tests yielded signs it could make an immune response system in the body. As many countries start to ease restrictions on their citizens, hopes in a demand recovery have investors dipping their toes into risk-on assets. Amongst the 94% of winners recording gains today, JETS, an ETF that tracks US airlines and airline manufacturers, is up 11.6% in the risk-on rally. However, they are still down around 58% for the year.

Hopes in vaccine pushes risk-on rally

This risk-on rally may be short-lived; however, as market participants take any good news with regards to a vaccine as a reason to invest / trade. Jeffrey Kleintop told Bloomberg that “the market is very tied to measuring the success of these economic reopenings” and that “a successful vaccine would really make those reopenings very successful,” casting doubt about the risk on rally until a vaccine is fully developed. Furthermore, Fed Chairman Jerome Powell also casts some doubts on a recovery, stating that the US should “recovery steadily through the second half of this year” if US is able to avoid a “second wave of the coronavirus.” He has assured that the Fed has enough ammunition to help support the United States, with the Fed preparing to lend to middle-market businesses, allowing the central bank to extend up to $600 Billion in loans if required.

Demand in oil fueling risk on-rally

In the Commodities market, Crude breaks $35, and WTI contango closes. This is most likely on evidence pointing to Chinese demand reaching pre-coronavirus levels amongst ease in storage concerns and lockdown restrictions. Alongside previous Google mobility data showing tentative evidence of an increase in car usage, new evidence from TomTom’s traffic index showing rush hour traffic in Chinese cities at pre-coronavirus levels or above. With OPEC making good on supply cuts, an imbalance in demand eclipsing supply may push oil prices higher. However, it is not all positive for oil, as demand for jet fuel remains low, with many countries continuing with strict border restrictions even after lockdowns are lifted. Furthermore, it is worth noting that Jet fuel makes up around 8% of oil consumption globally, while gasoline makes up around 23%. Countries forming “mini bubbles” with other countries may slowly bring the demand for Jet fuel up.

The markets have been itching to buy the dip on any positive consensus. However, rallies in risk-on assets may be short-lived as a second wave is not out of the question given a vaccine is still months away.

Are you joining this risk-on rally?

Senior Analysts here at Blackbull Markets Phillip van den Berg and Andre Almeida have released some tremendous technical analysis on the Dow Jones rally and the USD/CAD, respectively. You can watch the videos here and here.

Blessings on Wall Street, Blood on Main Street

Wall Street has been on a tear recently. Here is a graph that shows the juxtaposition between Wall Street and Main Street

NASDAQ (in blue) against Non-farm Payroll (in red) change year-to-date  

The red line shows the percentage number of non-farm payrolls lost during the Coronavirus. The blue line represents the NASDAQ. As 12% of non-farm payrolls or 20 million Americans were made redundant, the NASDAQ retracts all of its losses during the year and edges up a gain of 1.8% year to date. How is it that millions of Americans are losing their jobs, yet pension funds and 401k's are squeezing out gains from Wall Street like the Coronavirus didn't exist?

Investors don't distrust Wall Street

The end of March was where Investors felt the most pain. Coronavirus turned into this problem that China was facing into a pandemic that encompassed the reality of everyone. As such, retail and institutional investors fled their risky assets, which provided them prosperity over the 9-year bull run into less volatile assets. For some that were sitting on the sidelines, a glaring entry point arose to, as they say, "buy the dip." With the NASDAQ being weighed nearly 50% towards technology stocks, it is no wonder why it has edged a gain year to date. As we stay at home, reliance on technology is more prevalent than ever. However, this does not explain why they're up if so many people have lost their jobs?

Wall Street looks into the future; jobs look at the present.

Part of the answer lies in the fundamental nature of stocks: they are anticipatory assets. Investors all around the world look at stocks to what they thing future earnings will be. For example, we can likely all agree that Zoom has had an influx of new customers using their platform, therefore come earnings season they are expected to have good numbers.

Warren Buffet was not convinced.

Not everyone is looking at the drop in asset prices looking to buy. Most notably, Warren Buffet, who is known to be the "lender of last resort," remains on the sidelines as his war chest nears $140B. Furthermore, he has fully exited his stake in his airline positions, stating uncertainty.

Unfortunately, for many businesses, jobs are an expense liability that does not have the luxury of being deferred into the future – they have to pay their employees now. And in these unprecedented times, there is very little demand for many goods and services that businesses have to offer, so to reduce their expenses, they have no choice to lay off staff. A silver lining can be found, as 18.1m of the unemployed classify themselves as "temporary" – giving hope that employers will rehire them once the Coronavirus is behind them.

However, you probably already knew that. What is the real reason stocks are up?

Swift action from the central banks and policymakers hoping to boost Main Street through Wall Street

Government and central banks all around the world were quick to accommodate the potential economic fallout from the spread of the Coronavirus. With interest rates cut, quantitative easing implemented, and fiscal stimulus injected, the reaction was swift and more directed in comparison to the 2008 Financial Crisis. The question arises – why was it so quickly this time around? Consensus points to the idea that we could point our finger to Wall Street and blame them for the crash, but this time around, it isn't anyone's fault. Fiscal stimulus and quantitative easing are more natural to get behind if it is for the good of the people. 

The quick reaction from central banks and policymakers, alongside the easing up on lockdown restrictions across the world, breeds optimism for risky assets.  However, concerns for a second hit to the stock market, with "Goldman predicting a heft drop after a FOMO-driven rally," with the chance that stimulus is propping up failing businesses.

 Are you buying the bull market?

We recently did a live stream talking about Oil's potential comeback and the recent rally in the US equity markets. You can watch the recording below.