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'The big surprise here is the efficacy': UBS's Stuart Kaiser on market reaction to Pfizer vaccine reports

Stuart Kaiser, UBS Head of Equity Derivatives Research, joined Yahoo Finance Live to discuss today's market action as investors digest the election results and COVID-19 vaccine news from Pfizer.

Video Transcript

ADAM SHAPIRO: Want to invite into the stream to talk about all of this Stuart Kaiser. He is UBS Head of Equity Derivatives Research. It's good to have you here, Stuart.

And there was something you pointed out before the incredible run we saw today on the Pfizer news which was that there was a large rise in third-quarter put open interest. And that usually-- you know, what would that tell an investor? Because if people are trying to get insurance but they can't close these contracts, what does it say?

STUART KAISER: Yeah, good afternoon. You know, I think last week what we saw, you know, post election was a little bit of the reverse of what we've seen today, which was markets higher with tech leadership yet the cyclical parts of the market lagging. And as a result, we did see a lot of investors step in and buy put options on the NASDAQ to try to hedge that large move, particularly if there were risks that, you know, the Democrats were going to be a little bit more aggressive towards the tech sector.

So I think what we saw last week was, you know, tech at an all-time high, investors getting a little bit uncomfortable and decided to try to hedge some of those risks. This week has obviously taking the exact opposite pattern, which is the NASDAQ has been about flat and there's been demand for lots of other parts of the market.

So, I think, you know, the last week has really whipsawed investors in terms of election expectations, the path of the market, and how to deal with that. And as a result, you did see a fair amount of put buying and hedge protection that, you know, frankly obviously hasn't helped very much today.

SEANA SMITH: So we're going off of what we're seeing today. When you're seeing such a massive rally, how much does the timing of the vaccine matter? Because as we were talking about last block with our reporter Emily McCormick and also our Dr. Chen, there's still so much uncertainty out there. So whether it's March, whether it's May, whether it's July, does that matter at all to the market at this point?

STUART KAISER: I think it does. You know, if I were to just to have broad brushed where expectations were coming into this would have been, you know, positive news on a vaccine before year end, something approved sort of first quarterish of next year, and then kind of broad-based distribution during next summer. I think that's where most investors' heads were.

You know, the news we got today I think, you know, slides up the time frame maybe a little bit but not as much. I think the big surprise here was the efficacy. You know, I think if you would have polled investors before this, the efficacy range would have been, you know, 50% to 75% as sort of a wide range. And if this number is truly, you know, 90% or above, I think that is what the market is responding so positively to.

So the time frame does matter because if you have a GOP Senate and you're not going to get stimulus in the near term and you're waiting for this, you know, vaccine for another 8 to 10 months, then clearly that time frame matters because in between there, you've got an economy that's going to be really struggling and under pressure.

So the time frame does matter. I just don't know that the news today necessarily surprised the market in terms of what they were expecting from a timing perspective.

ADAM SHAPIRO: So where could somebody, if they have like a six-month horizon, seek some protection right now to weather-- I don't want to call it a storm, but it is a storm to the upside.

STUART KAISER: Yeah, so what we've been recommending to the upside is to focus on, frankly, global cyclical parts of the market, you know, emerging markets, China, and areas like that just in the sense that if you did get a big stimulus package or you did get a broader, you know, more effective vaccine than expected, that was an area where we thought you could see kind of a large rise. Those have underperformed a little today, though German equities have done fairly well.

The other thing people have tried to fade-- and you mentioned earlier-- was just the really poor performance of banks and energy year to date. And those are the two parts of the US market that have just, you know, moved massively. Those are also two parts of the market where volatility was very high because of that uncertainty.

So I think in the US, you probably see the areas most directly impacted by the vaccine do the best, and that's going to be energy, banks, you know, travel, leisure, and those types of stocks that you mentioned. I think globally it's probably things like emerging markets that need to play a little bit of catch up.

And if you do get an easy Fed and you were to push some stimulus through-- excuse me-- on top of the good vaccine news, I think that is sort of the cocktail that most macro investors are hoping for next year to really push the next leg of the market.

SEANA SMITH: Stuart, I'm going to back to what you just said about Germany. It's interesting just because of what we're seeing play out over there in terms of the rise of COVID cases. Is that not a concern to you there just in terms of some of that headwind that we could be up against at least in the short term?

STUART KAISER: It's definitely a concern. I mean, you know, as recently as last week, I would have told you the two biggest risks to the market are that US growth has slowed down and the virus curves have accelerated. And a country like Germany where Merkel, you know, committed not to do more lockdown has locked down again.

So I think, in my opinion, this week, if it wasn't for the news overnight, you know, the narrative coming from us would have been, look, you've had a huge rally. You've got significant growth risks, and you're entering a period of the calendar which could be really challenging from a virus-case perspective.

So, you know, to me, the challenge going forward from here is how much will the market look through those risks that you've identified and just hang its hat on the fact that we'll have a vaccine hopefully next summer? And especially if there's no stimulus, you're really hanging your hat on that vaccine because if the data does weaken, there's probably not going to be a big spending program to help it.

So, you know, we're definitely concerned about that. And, you know, frankly, earlier this morning, that's what we would have been talking to clients about. You know, the vaccine news now is going to distract for a bit. But again, you know, the next couple of months, to your point, you know, if viruses are rising, we're going to get data. And if that data is not good, the market is going to really have to balance those two risks.

I think what that means is if you get bad news, you're going to get some pullbacks, but those pullbacks are probably shallower and probably get bought more aggressively because people I think now believe there is sort of light at the end of the tunnel that they can actually visualize.


STUART KAISER: So it should improve risk/reward, but it [INAUDIBLE] risk, to your point. So definitely something we're concerned about.