Markets had a strong day on the surface, but some factors point to a more tepid risk sentiment on Wall Street Wednesday.
The S&P 500 gained 1.4%, aided by the tech-heavy Nasdaq’s gain of 2.13%. Tech stocks have a heavy market cap weighting in the S&P 500.
The 10-Year Treasury yield rose to 0.67% from 0.64%. Yields fall as prices rise. But that move was partly on the back of improving risk appetite -- the economic rebound looks sharp currently -- and partly as a result of supply pressure keeping treasury prices down. The Treasury Department is issuing new long-term bonds to finance the fiscal spending the economy needs. So risk appetite appeared stronger in the bond market than it may have actually been.
As for equities, cyclical stocks -- which are inflation-sensitive -- were barely pulling their weight. While the yield curve has expanded meaningfully in the past few days, bank stock investors are well aware that interest rates are bound to remain pressured if the recovery is uncertain. Banks fell about 0.6%.
Other cyclical sectors like consumer discretionary, oil and industrials rose less than 1% and underperformed the growth stocks and the major indices. Large cap materials fell 0.04%.
The positive news aiding sentiment: Moderna (MRNA) - Get Report has a $1.52 billion deal with the U.S. government to supply 100 million doses of a COVID-19 vaccine. The stock rose 0.8% after having gained 7% in the morning.
Pfizer (PFE) - Get Report also has a deal with the government to supply hundreds of millions of doses in the near future. On Tuesday, Russian president Putin said the country has the first vaccine ready, but its vaccine skipped phase three of the trial process, raising safety concerns among experts. Overall, investors are positive on a vaccine hitting the market soon, as many players are racing to find a COVID-19 solution.
But before a vaccine hits the market, the economy needs more fiscal stimulus. Interest rates cannot fall much from here and small businesses and households need cash soon in order for consumer spend to be supported. Fiscal stimulus proved effective in May and June before a spike in cases hurt consumer confidence and caused states to pause reopenings. If too many businesses close, the road back to full employment will be a longer one.
Here’s what Wall Street’s saying:
Chris Larkin, Managing Director, Trading and Investment Product, E*Trade:
"The vaccine conversations seems to be shifting from if to when, and there’s a bit more certainty around what a Biden administration would look like, with Harris joining the ticket, who no less is understood as a moderate by the Street. The SPX was knocking on the door of a new high yesterday before retreating, but today’s positive geopolitical news could provide the gas to get us there.”
Matthew Harrison, Biotech Analyst, Morgan Stanley:
“Overall, we believe the contract provides further confidence that Moderna can supply and produce vaccine at scale."
Brian Rose, Senior Economist, Americas, UBS:
“Fiscal deal elusive so far. Most data for July showed the economic recovery continuing despite higher numbers of new COVID-19 cases. Negotiations over the next fiscal package have so far not produced a deal. The loss of fiscal support could cause considerable near-term harm to the economy. While the near-term outlook is cloudy, any interruption to the recovery should be brief. Even before the CARES Act passed, Republicans tried to amend it to prevent anyone from receiving more in unemployment benefits than their previous salaries, and many businesses have said that it is difficult for them to attract workers because the benefits are too high. Our expectation was therefore that as part of the next fiscal package, Congress would extend the enhanced benefits but reduce the amount to something less than USD 600. However, the end of July has now passed, the last of the extra USD 600 payments has been sent out, and negotiations over the package appear to have broken down.
David Miller, Chief Investment Officer, Catalyst Capital Advisors to TheStreet:
“The move [in FAAGNG stocks} seems to be driven by mean reversion. The sell-off in tech over the past week has been quite sharp and overdone."