The market is underpricing the possibility of a vaccine, Goldman Sachs strategists say


French engineer-virologist Thomas Mollet looks at 24 well plates adherent cells monolayer infected with a SARS-CoV-2 virus at the Biosafety level 3 laboratory of the Valneva SE Group headquarters in Saint-Herblain, near Nantes, France, on July 30, 2020.


jean-francois monier/Agence France-Presse/Getty Images

The market is underpricing the possibility of a vaccine, Goldman Sachs strategists say.

Forecasts are assuming a nearly 40% chance of a vaccine being broadly available by the first quarter of 2021, and the strategists, led by Kamakshya Trivedi, say there is a good chance that at least one vaccine will be approved by the Food and Drug Administration by the end of November and broadly distributed by the middle of 2021. “This kind of timeline could see a substantial boost to GDP [gross domestic product] relative to a ‘no-vaccine’ case, particularly for the U.S., which is likely to lead the vaccine race and is likely to experience worse outcomes than in Europe without a vaccine,” the strategists say.

The steep rise in vaccine probabilities is one key reason that the equity market has managed to make new highs even without definitive improvement in U.S. health outcomes, the strategists add, with the other reason being the fall in inflation-adjusted bond yields.

The S&P 500
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+0.64%

has climbed 49% from its March lows, and the technology-led Nasdaq Composite
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+0.99%

has registered 31 records this year.

The current equity market level is consistent, they say, with a 60% chance of no vaccine.

“On these estimates, options markets may be underpricing the fatness of both ‘tails,’ especially the upside case. Out-of-the-money call options on the S&P 500 (and some other indices) still look attractively priced given our view of the vaccine timeline outcomes,” they say.

The strategists also say the U.S. election is being underappreciated, not for its impact on domestic policy but for international relations. The “international implications both in the run-up to the election and beyond will be equally important for market direction in coming months,” they say. While the slow-motion decoupling of the U.S. and China will probably continue regardless of who wins, “a Biden administration would likely use different tactics, including more cooperation with traditional allies and less aggressive use of tariffs.” This, in turn, could lead to another leg of the dollar
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+0.38%

falling, particularly against the yuan
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+0.10%
.

A vaccine could spark a renewed rotation toward traditional cyclicals, steeper bond-market yield curves, and outperformance in emerging market currencies and equities. “We suspect that it is still too early to position aggressively for that shift, but think that options exposure in some of these areas may already make sense,” they say.

School reopening risks, they add, may continue the theme of low real rates, tech leadership, and the defensive rally of the past month. “But with some of these moves getting stretched, investors should be open-minded about the possibility of a shift in leadership across global markets in the months beyond, especially if the news flow on the vaccine front continues to be encouraging,” the strategists said.



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Trump’s ban against WeChat owner Tencent could have huge implications for U.S. companies


Did President Donald Trump just blow up the U.S. videogame industry?

That was the question on a lot of minds after Trump issued executive orders Thursday night banning “transactions” with the Chinese owners of the TikTok and WeChat apps starting Sept. 20. While the move against TikTok’s owner — Beijing-based Bytedance — was not a huge surprise, action against WeChat’s owner — Shenzhen-based tech giant Tencent Holdings Inc. — was.

That’s because Tencent is one of the world’s largest and most valuable companies, with ownership stakes in a number of U.S. videogame companies, including Riot Games, which makes “League of Legends”; Epic Games, which makes “Fortnite”; and Activision Blizzard
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+2.98%

, which makes “World of Warcraft.”

Tencent also has significant stakes in Tesla Inc.
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and Snap Inc.
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-1.61%

, the maker of Snapchat, and the Chinese company has streaming deals in place with the NBA, the NFL and Major League Baseball. The order could potentially also affect Apple Inc.
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+3.48%

and Alphabet’s
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+1.74%

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+1.79%

Google app stores, which feature Tencent-owned apps.

The executive order took aim directly at WeChat, which has more than 1 billion users worldwide, and whose “data collection threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information,” the order said.

But the wording of the order made it unclear if the ban affected just WeChat or all of Tencent’s holdings, saying: “any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd. … Shenzhen, China, or any subsidiary of that entity.”

Either way, the order is likely to be challenged in court.

Tencent shares
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-4.41%

in Hong Kong sank in Friday trading after the announcement. The news broke after the extended trading session in the U.S. closed, but traders will likely keep a close eye on how shares of Tesla, Activision Blizzard and others fare in the morning.

Banning all business by U.S. companies with WeChat’s parent — if that is the case — could prove to have much farther-reaching effects than Trump may have anticipated.

“Likely he had no idea,” tech journalist Kara Swisher tweeted Thursday night.

Many on social media Thursday night expressed surprise and alarm:





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Jeff Bezos, Elon Musk would pay tens of billions each under this whopping one-time tax proposal


Sen. Bernie Sanders


AFP/Getty Images

A new bill co-sponsored by Sen. Bernie Sanders would impose a one-time windfall tax on the wealth that billionaires have accumulated during the coronavirus pandemic, using the proceeds to pay for free out-of-pocket health-care costs for all Americans for a year.

The “Make Billionaires Pay Act,” introduced Thursday by Sanders and Democratic Sens. Ed Markey of Massachusetts and Kirsten Gillibrand of New York, would slap a 60% tax on the roughly $731.8 billion that the 467 richest people in America have accumulated since March 18 — a period in which more than 50 million Americans have applied for jobless aid, 5.4 million lost their health insurance and the nation’s economy has been thrown into shambles.

Proceeds from the one-time tax would allow Medicare to cover all out-of-pocket health-care costs for every American, including prescription drugs, for one year, the senators said.

In a statement, Sanders, the Vermont independent, said the bill would “tax the obscene wealth gains billionaires have made during this extraordinary crisis.”

 “At a time of enormous economic pain and suffering, we have a fundamental choice to make,” Sanders said. “We can continue to allow the very rich to get much richer while everyone else gets poorer and poorer. Or we can tax the winnings a handful of billionaires made during the pandemic to improve the health and well-being of tens of millions of Americans.”

Also read: This ‘dire’ economic situation ‘deserves to be called a depression — a pandemic depression’

According to the statement, after the tax, the richest 0.001% of Americans would still be left with more than $310 billion in collective wealth gains this year.

Some big names were singled out:

— Amazon.com Inc.
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+0.62%

CEO Jeff Bezos, the richest individual on the planet and whose wealth has risen 63% during the pandemic to more than $190 billion, would pay a one-time tax of $42.8 billion.

— Tesla Inc.
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+0.30%

CEO Elon Musk, whose wealth has nearly tripled as Tesla stock has skyrocketed in recent months, would pay $27.5 million.

— Facebook Inc.
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+6.48%

CEO Mark Zuckerberg, whose wealth has risen by nearly $40 billion during the pandemic, would pay $22.8 billion.

— The Walton family, heirs to the Walmart Inc.
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-0.35%

fortune whose wealth has grown by $21 billion, would pay $12.9 billion.

“Incredibly,” the senators said in a statement, “these billionaires currently pay a lower effective tax rate than teachers or truck drivers.”

No one with a net worth of less than $1 billion would pay the tax, they said.

“Requiring billionaires to pay their fair share will help support workers and families dealing with job losses, food insecurity, housing instability and health care,” Gillibrand said. “Not only is this a common-sense proposal, but it’s a moral one and Congress should be doing all we can to assist Americans struggling right now.” 

Taxing the ultra-rich has become a popular cry for Democrats following the Trump tax cuts of 2017. Last year, Sen. Elizabeth Warren, D.-Mass., proposed a tax on “ultra millionaires” as part of her presidential campaign.

It should be noted that, as MarketWatch reported earlier this year, starting the clock at March 18 lacks some context, as investors started worrying about the pandemic in February, leading to the stock market’s temporary but steep tumble.

For the year, the Dow Jones Industrial Average
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+0.68%

is down 4%, while the S&P 500
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+0.64%

is up nearly 4% and the Nasdaq Composite
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+0.99%

has gained 24%.



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Uber, Lyft drivers in limbo as judge hears arguments in case brought by California


Uber and Lyft on Thursday defended against a lawsuit, brought by California and San Francisco, Los Angeles and San Diego, accusing the companies of not complying with a law to classify their drivers as employees.


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A judge said Thursday he would probably decide “within a matter of days, not weeks,” whether he will order Uber Technologies Inc. and Lyft Inc. to immediately comply with a California law that classifies their drivers as employees, in a closely watched case that could deal a blow to the business models of the ride-hailing giants.

The pending decision by Judge Ethan Schulman of the San Francisco County Superior Court on the lawsuit by California’s attorney general and the city attorneys of San Francisco, Los Angeles and San Diego — who are seeking an immediate injunction ordering the two companies to reclassify their drivers — could have wide-reaching repercussions on the gig economy.

Schulman mentioned a few times that he was struggling to balance the harms that an immediate injunction could bring, especially after Lyft
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+4.69%

attorney Rohit Singla characterized it as a “dramatic” and unprecedented action that would be burdensome to the companies and could lead to hundreds of thousands of drivers losing “income opportunities.”

“I feel a little bit like I’m being asked to jump into a body of water without really knowing how deep it is, how cold the water is and what’s going to happen when I get in,” the judge said during the nearly three-hour-long hearing in San Francisco, which was conducted virtually.

AB 5, which became law on Jan. 1, codified a 2018 California Supreme Court ruling. The ruling, known as Dynamex, adopted an “ABC test” that says workers can be considered contractors only if they control their work; if their duties fall outside the scope of a company’s normal business; and if they are “engaged in an independently established trade, occupation or business.”

Uber attorney Theane Evangelis argued that some changes the company has implemented since AB 5 went into effect, including allowing drivers to set their own rates in a limited fashion, ensure that the company can meet the ABC test.

When AB 5 passed, it was widely seen as a threat to the gig economy’s business model, which relies on independent contractors who are not provided guaranteed minimum wages or benefits.

The drivers’ lack of benefits became even more pronounced during the coronavirus crisis, as demand for rides plunged amid widespread lockdowns. Drivers did not have paid time off or employer-backed health care amid a pandemic. Many sought unemployment benefits.

“What we think is dramatic is that these workers are being systematically denied a wide range of employee protections and being harmed by these practices,” said Matthew Goldberg, deputy city attorney for the San Francisco City Attorney’s office.

In their lawsuit, the state attorney general and city attorneys list as violations the companies’ failure to pay unemployment insurance taxes and other taxes toward the state’s social insurance programs.

Goldberg pointed out Thursday that the two companies have more than $11 billion of cash reserves combined.

Uber
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+4.54%

and Lyft argued that they should not have to comply with AB 5 until after California residents vote on Proposition 22, an initiative the companies backed that will be on the state ballot in November. It seeks to define ride-hailing and delivery drivers as independent contractors and establish specific labor and wage regulations for app-based companies.

The companies often say they provide drivers with flexibility, and attorneys for both Uber and Lyft made that same argument Thursday.

But San Francisco City Attorney Dennis Herrera said in a statement after the hearing that “There is no rule that prevents these drivers from continuing to have all of the flexibility they currently enjoy. Being properly classified as an employee doesn’t change that.”  

Uber declined comment Thursday. Lyft did not immediately respond to a request for comment.

Uber and Lyft are also facing other lawsuits over worker classification, including ones filed this week by California’s labor commissioner accusing the two ride-hailing giants of wage theft “by willfully misclassifying drivers as independent contractors instead of employees.” The lawsuits filed Wednesday in Alameda County Superior Court against each company by Lilia Garcia-Brower seek back wages, damages and penalties, including for failure to provide minimum wages, rest breaks, overtime pay and more.

According to Nicole Moore, a Los Angeles-based organizer with Rideshare Drivers United, more than 5,000 drivers have filed wage claims with the state. “You can’t really overlook claims of $1.35 billion,” she said in an interview. In a letter to drivers dated Aug. 5, the California Division of Labor Standards Enforcement said those claims would be dismissed by the state because it is now suing the companies and seeking those wages on drivers’ behalf.

See: Uber’s delivery business tops core ride-hailing as pandemic rocks earnings

Thursday’s hearing came on the same day Uber reported that it lost $2 billion in the second quarter as rides plunged 67% compared with the year-ago quarter. Lyft is scheduled to report its results next week.



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A ‘golden cross’ has formed in the Dow Jones Industrial Average


A golden cross formed in the Dow Jones Industrial Average
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+0.68%
,
more than five months after a bearish chart pattern materialized in the aftermath of the carnage wrought by the COVID-19 pandemic.

A golden cross occurs when the 50-day moving average for an asset price trades above the 200-day MA, while a so-called death cross, comparatively, is when the 50-day falls below the long-term average.

On Thursday, the Dow’s 50-day stood at 26,251.34, and the 200-day moving average was at 26,229.91, according to FactSet data, marking the first time the short-time moving average has punched up above the longer-term average since March 20, and forming a chart pattern that is widely regarded as signaling that a trend higher for stocks appears to be at hand.

As MarketWatch’s Tomi Kilgore notes, crosses, overall, aren’t necessarily good market-timing indicators, however, as they are well telegraphed, but they can help put an asset’s move into perspective.

The last golden cross for the Dow occurred on March 19, 2019 and led to a steady rally for stocks until the death cross that formed nearly exactly year later in the wake of the pandemic.

Read: MarketWatch’s snapshot of the market for Thursday

The golden cross for the Dow comes about a month after a similar cross occurred in the S&P 500 index
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+0.64%
.

Despite continued weakness in the economy, with the spread of the COVID-19 epidemic in many parts of the U.S. and the world, stocks have still climbed, boosted by government spending and Federal Reserve support for markets.

Technology names have been at the vanguard of the rally from the lows that were put in U.S. markets back in March as they benefited from work-from-home orders while businesses were shut down. However, the perception that technology-related companies are better situated to prosper in the aftermath also has helped the tech-heavy Nasdaq Composite Index
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+0.99%

to register 32 record closes so far in 2020 while the S&P 500 and Dow have lagged behind.

The Dow, made up of 30 companies, has the lowest concentration of so-called technology or technology related companies and is a price-weighted gauge so its performance has been slightly weaker than those for the S&P 500 and the Nasdaq.

More than half of the Nasdaq comprises tech-related companies while more than a quarter of the S&P 500 consists of tech names.

Only a fifth of the Dow is tech, including Microsoft Corp
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+1.60%
.
Apple
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+3.48%
,
Cisco Systems
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+0.93%
,
Visa
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+1.36%
,
International Business Machines
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+0.53%

and Intel Corp.
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-0.04%

Those behemoth companies have helped the overall market mount a recovery from the coronavirus-induced lows, and as a result tech-leaning indexes have risen by the most.

The Nasdaq has surged by nearly 62% since its March 23 low and the S&P 500 has climbed almost 50%.

The Dow, isn’t far behind, and has gained 47% since its late-March nadir.

That said, the golden cross formation may suggest to some that the 124-year-old blue-chip index isn’t far from notching its first record since Feb. 12. The Dow stands about 7.3% from its all-time high, while the S&P 500 is about 1.1% from its Feb. 19 record closing high.

To be sure, a rejection of the golden cross isn’t unprecedented. A golden cross formed in January of 2016 but the Dow fell back into a death cross before carving out a new high, according to Dow Jones Market Data.



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