Risk appetite surges on positive vaccine news and US election result. US equities surge to record high. Global yields much higher. Vaccine news must surely weigh on RBNZ policy outlook update tomorrow

Risk appetite has surged, with enthusiasm of Biden’s victory in the US election buttressed by positive vaccine news by Pfizer/BioNtech. US equities have surged to fresh record highs while bond markets are under massive pressure, with double-digit gains in yields across many markets. Currency safe havens CHF and JPY have plunged and while the NZD recorded a fresh 20-month high, its gains relative to yesterday afternoon are modest.

It was risk-on from the outset Monday morning with US equity futures higher and risk currencies performing as the market embraced the US election results, with Biden widely called as the winner of the Presidential race during the weekend and the Senate was on track to remain in Republican hands – seen as the best of both worlds, with Biden able to reverse some of Trump’s questionable foreign policy actions but not in a position to run with the Democrat’s domestic policies of tax-and-spend and increased regulations.

Just after midnight, NZ time, the market was hit with some positive vaccine news. A preliminary study of the vaccine developed by Pfizer and BioNtech produced promising results, preventing more than 90% of symptomatic infections in a trial of tens of thousands of volunteers. US health expert Fauci said it was an “extraordinary” result, with the effectiveness for the first vaccines previously expected to be in the range of 60-70%. Much more data is required before mass vaccination can occur, but one expert was quoted as saying that “it helps provide proof of concept that it is possible to make a human COVID19 vaccine”. While more data are being collected, emergency use authorisation in the US could be applied for later this month. An alternative vaccine developed by Moderna is based on similar technology and its first results are expected in coming weeks.

A vaccine can’t come soon enough, given new case numbers in the US have blasted through the 100,000 per day mark over recent days. NY mayor Bill de Blasio said that NYC was coming “dangerously close” to a second wave. President-elect Biden unveiled his transition team’s coronavirus taskforce, with containing the pandemic his first priority. Given the rapid spread of the virus, surely it seems likely that the taskforce will give guidance to States to introduce restrictions to stop its spread, including lockdowns and limiting large gatherings of people. But any policies put in place by the board won’t come into effect until Biden is sworn in as President, late January.

According to the WSJ, Biden’s transition team is currently focused on deciding who will fill senior roles in the White House and across the government. It was also discussing executive orders that would reverse some of Trump’s signature policy initiatives. These could include Trump’s decision to pull out of the Paris climate-change agreement and the extent of import tariffs imposed on Chinese goods.

Higher risk appetite has driven the S&P500 up to a new record high, up as much as 3.8% at one stage before gains receded, now currently up just over 3%. Losers from the pandemic have seen some of the biggest gains, while winners from the working-from-home environment have underperformed. The Nasdaq index is “only” up 0.6%. The Euro Stoxx 600 index closed up 4%.

In terms of the global economy, a vaccine would be a game-changer and reduces the need for further monetary stimulus around the world. The rates market has reacted accordingly, with rises across curves and across markets. US Treasury yields are up 3bps at the 2-otear end of the curve, and up 14bps to 0.96% for the 10-year, stretching as high as 0.97%. The 10-year rates for the UK, France and Germany were up 10-11bps.

Commodity markets reflect the vaccine news, with oil prices surging 8-9% and precious metals much weaker, with gold and silver down 5-7% respectively.

Safe haven currencies have significantly underperformed, with USD/JPY up over 2% to 105.50 and USD/CHF up 1½% since last week’s close. Commodity currencies have outperformed, with the NZD up 0.7% to 0.6820 from last week’s close. So only small progress has been made since mid-afternoon, NZ time, but the currency peaked at a fresh 20-month high of 0.6855 overnight, before quickly receding.

The vaccine news must surely weigh on the RBNZ’s policy outlook ahead of its policy statement tomorrow. The Bank will be flying a little blind, given the timing of widespread vaccination is still unknown, but the “proof of concept” evidence is a positive development for the medium-term outlook, which the Bank has said it is focused on. NZ rates were higher across the curve yesterday, reflecting the upward pressure on US and Australian rates since Friday’s close. Added to the mix was some nerves ahead of tomorrow’s RBNZ MPS, with some questioning how dovish the Bank would be. The 2-year swap rate continued to see a payside bias, up 1bp to 0.05%, while the 10-year rate was up 2bps to 0.57%. The 10-year NZGB was up 3bps to 0.59%.

Back to other currencies, the AUD followed the same pattern as the NZD, peaking at 0.7340 overnight before receding back to the level seen yesterday afternoon, just under the 0.73 mark. The NZD/AUD cross has oscillated between 0.9320-0.9360.

With downward pressure on JPY, NZD/JPY has surged 2.7% since last week’s close to 71.9. The outperformance of the NZD also sees upward pressure on NZD/EUR (up over 1% to 0.5770) and NZD/GBP (up 0.8% to 0.5190). Overall, the USD has recovered some poise after last week’s fall, apart from slippage against the commodity currencies.