News that a vaccine being trialled by Pfizer for Covid-19 offers more than 90 per cent protection against the virus, which has claimed over 1.2 million lives since January, propelled global equities higher on Monday but bonds and gold lost appeal.
Risk appetite grew and investors pulled out of defensive assets, diverting cash into stocks closely tied to economic growth in the wake of the vaccine breakthrough that may help control the worst pandemic in a century.
The potential breakthrough in the fight against the pandemic could not have come sooner as global Covid-19 infections passed the 50 million mark on Monday. Covid-19 cases in the US alone have crossed 10 million and the country is bracing for record hospitalisations this week.
“The prospect of a vaccine jolted world markets higher,” Shady Elborno, the head of macro strategy at Emirates NBD, said.
The Pfizer news is a “major milestone”, he added, but said “questions remain around how effective the vaccine is for vulnerable groups and how long it will provide immunity”.
There were obvious winners and losers in the wake of the Pfizer announcement on Monday as oil majors and hospitality companies soared along with airline stocks on the prospects of a rebound in demand, while technology shares slumped.
The S&P 500 Index closed at a two-month high, gaining 1.17 per cent, while the Dow Jones Industrial Average jumped 2.95 per cent. The broad Russell 2000 index gained 3.7 per cent.
The Eurostoxx 50 index advanced 6.4 per cent, Germany's DAX climbed 4.9 per cent and the FTSE 100 rose 4.7 per cent.
The rally on Monday in Asia sputtered on Tuesday, however, as most markets pared gains. The Nikkei 225 was up 0.3 per cent, the Hang Seng was 1.1 per cent higher and the Shanghai index was down 0.6 per cent at 1.15pm UAE time.
"There is no doubt that we could easily see several episodes of this in the coming days and weeks," Naeem Aslam, chief market analyst at Avatrade said. "Yesterday’s stock market rally reminded us of the time when the global stock market reacted to the first potential coronavirus vaccine trial news."
Pfizer stocks climbed 7.7 per cent on Monday. Drug maker Biogen’s shares, which rose as much as 47 per cent last week on experimental Alzheimer’s disease therapy effectiveness, slumped more than 28 per cent.
Shares of Eli Lilly, whose antibody therapy was granted an emergency-use authorisation by US drug regulators for treating Covid-19, gained as much as 5.2 per cent but ended trade 0.3 per cent lower on Monday.
Shares of aircraft manufacturers climbed on hopes that a vaccine will revive travel demand that could help save the aviation industry from the worst crisis in its history. Boeing surged 13.7 per cent on Monday, while Airbus shares also climbed 18.57 per cent. Engine manufacture Rolls-Royce's shares surged more than 40 per cent.
Airline stocks also rose following the Pfizer announcement. Cash-strapped carriers that were forced to ground aircraft and cut jobs or furlough staff are hoping a global inoculation programme will boost demand for travel.
Shares of United Airlines climbed 6.93 per cent, American Airlines Group rose 1.93 per cent while Delta jumped 17 per cent. IAG, the parent company of British Airways, surged more than 25 per cent. On Tuesday, shares in airlines in the Asia-Pacific region also rallied strongly. Singapore Airlines advanced 13 per cent, Cathay Pacific jumped 12.6 per cent, Qantas climbed 8.3 per cent, while Japan Air surged more than 21 per cent.
"Realistically for the first time since the panic of February and March, market participants are starting to seriously think about a normally functioning global economy and how to position for that most-welcome return to normality," James Athey, investment director at Aberdeen Standard Investments, said.
Shares in tourism and hospitality sector companies that had taken a severe hit due to the pandemic also rebounded on Monday. Hyatt Hotels surged 19.8 per cent, Marriott International rose 13.8 per cent, InterContinental Hotels Group and Hilton Hotels rose 12 per cent each, while Walt Disney Corporation shares climbed 11.9 per cent.
Oil prices surged above $40 per barrel on Monday following news of a vaccine breakthrough. Brent crude prices jumped 7.5 per cent on Monday and rose a further 1.9 per cent to $43.19 per barrel by 1.42pm on Tuesday. WTI also continued to climb by 1.6 per cent on Tuesday to $40.94 per barrel after gaining 8.5 per cent on Monday.
ExxonMobil gained 12.6 per cent on Monday, Chevron stocks jumped 11.6 per cent, Total surged 15.1 per cent, while BP in London also advanced 15 per cent.
The technology-heavy Nasdaq Composite Index declined 1.53 per cent with companies that rallied in the wake of the pandemic losing ground. Amazon led a slide in tech heavyweights, dropping more than 5 per cent on Monday. Netflix also slumped more than 8 per cent. Both Amazon and Netflix have benefitted from global lockdowns as movement restrictions boosted demand for their services. Microsoft dropped 2.38 per cent, while Apple stocks slipped 2 per cent.
Zoom, the California-based video communications and conferencing technology firm, which helped to keep the corporate world connected during the pandemic, slumped more than 17 per cent.
"It is highly likely that work-from-home stocks may continue to face more pressure in the coming days," Mr Aslam said.
Investors shunned bonds as the investment climate turned to a risk on mode. Yields on 10-year US Treasuries traded at the highest levels since March, sending prices lower, while US junk-bond yields fell to a record low, as risk appetite on debt assets grew.
The average yield for the Bloomberg Barclays US corporate high yield index dropped to 4.56 per cent, sinking below the previous record of 4.83 per cent set in June 2014, according to Bloomberg.
Gold, a traditional haven for investors, declined on the improved vaccine outlook, with spot gold prices dropping 5 per cent to $1,854.07 per ounce. It advanced 1.16 per cent on Tuesday to $1,884.72 per ounce.