Market rally despite cheap vaccine's trouble to fight virus mutation

Market movers today

Today we get have interesting data out of Denmark. Demand indicators suggest we will see both industrial production and exports at decent levels.

We also get industrial production from Germany. December orders declined indicating slowdown at the beginning of the year, but manufacturing PMIs remain elevated and hit 2½ year peak in December.

Looking further ahead, we have a fairly thin week on the data front with final January CPI figures out of Germany as a highlight, as it will hopefully give some more answers on what drove the inflation spike in the Euro area. We will also look out for the European Commissions' economic forecasts.

The 60 second overview

Significant bad vaccine news over the weekend. A new study suggests that AstraZeneca has only limited efficacy versus the South African variant, at least for mild diseases, see Times Live. We know that other vaccines also have lower efficacy against the South African variant but this is the first time a study has shown "limited" efficacy. It is too early to say whether the vaccine is also ineffective preventing severe cases (and hospitalisations) so this is a space to watch. AstraZeneca's vaccine is cheap and easier to handle so this is especially bad news for developing countries, not least in Africa. South Africa has suspended the use of AstraZeneca for now, see Reuters. On a positive note, UK regulators say that the AstraZeneca vaccine is also effective in the elderly, see Reuters. Johnson & Johnson has requested Emergency Use Authorisation in the US, and the US FDA will discuss on 26 February, see press release. Another positive piece of news is that an Israeli hospital claims it has found a drug that is highly effective for patients in serious conditions, see ynet. Overall, we still think one of the key risks this year is vaccine efficacy against mutations so we continue to monitor research on this topic closely.

Italian politics: Last week, fixed income markets rallied on the news that former ECB president Mario Draghi will try to form a caretaker government. Draghi's attempt saw good news over the weekend as he secured conditional backing from both the populist 5-Star Movement and the far-right Lega party and also businesses and financials rally behind him. Gathering enough political support remains a challenge, though.

Equities rose Friday for the fifth day in a row, making it a great start to February with MSCI world up more than 4%. No clear leadership between styles and sectors but still cyclicals slightly ahead of defensives and small cap outperforming. Dow +0.30%, S&P 500 +0.39%, Nasdaq +0.57%, Russell 2000 +1.40%.

No signs of changes as we start a new week with broad based gains in Asia led by Japanese stocks rising almost 2%. European and US futures also grinding higher the first day of the week.

FI: The sell-off in the bond market continued last week as 10Y Treasuries rose some 10bp during the week, while Bunds rose 7bp. Furthermore, the curves steepened as the 2-10Y US Treasury curve steepened some 7-8bp, while 10-30Y US Treasury curve steepened 3-4bp. We have seen a similar move in the German government bond curve, where 2-10Y steepened 6bp and 10-30Y steepened 2-3bp. The rise in yields is driven by the expectations for a significant fiscal stimulus package from US, the record supply in the +20Y end of the European bond market, roll-out of more vaccines and higher inflation expectations.

FX: In the final session of a week generally characterised by positive vaccine news the broad USD weakened and commodity currencies gained. EUR/USD moved back above the 1.20 resistance level on a disappointing non-farm payrolls report while a sell-off in NOK rates and bid commodities sent EUR/NOK back below 10.30. GBP strength eased somewhat, yet EUR/GBP remains below 0.88. EUR/SEK edged modestly lower.

Credit: Credit markets had yet another day of strong performance on Friday where iTraxx Xover tightened to 243bp (-2bp) and Main to 48bp (-½bp). Though HY tightening varied heavily depending on rating, all rating categories tightened, and overall, HY ended around 5bp tighter. Variation was much less pronounced in IG and the average tightening was around 1½bp.

Nordic macro and markets

No market movers out of Sweden and Norway today.