Virus fear offsetting vaccine news

7 minutes to read

Summary:  Stocks struggled overnight, ending the session lower as surging COVID19 hospitalisations in the US weighed on sentiment, with restrictions increasing in various US states, overshadowing positive vaccine news. But as the world recovers from the depths of crisis, growth will accelerate alongside inflation, whilst the financial system remains awash with new money and market leadership will pivot toward real economy stocks, non US markets and commodities.


Stocks struggled overnight, ending the session lower as surging COVID-19 hospitalisations in the US weighed on sentiment, with restrictions increasing in various US states, overshadowing positive vaccine news. New York City reached a 3% positive infection rate threshold, leading to the school system announcing the closure of schools which sent US futures tumbling.

The result in FX overnight, another choppy session, but any real flight to safety tepid. The dollar gaining modestly in Asia trade with COVID concerns fuelling a haven bid and AUD/JPY continuing to rollover on risk-off sentiment.

10yr Tsy yields, whilst broadly range trading, rose overnight following a weak 20yr auction, also reflective of a limited rush to safety and the spectre of persistent issuance. More broadly though, with a lengthier time horizon in mind, a reminder of the diminishing importance of Treasuries in portfolios, with the end result being risk for little reward, yields can head to 0, perhaps negative but on the flipside, inflation can surprise to the upside (it’s not set in stone but the building blocks are there). Although at some point the Fed would clearly step in and cap yields so as not to quash the fragile recovery. This dynamic has implications for traditional 60:40 allocations – it’s time to find a new hedge – as we have written several times since earlier this year where we have suggested larger weightings to real assets (Precious metals, Agricultural commodities, Base metals, and even Bitcoin). Traditional allocation models are shifting (or should be shifting) as fiat debasement continues and the opportunity cost of holding non yielding assets is diminished in the current environment. And there is little doubt that central banks will continue to deploy ammo whilst their targets remain a long way off.

Despite the overnight action, markets generally continue to climb the “wall of worry”, looking towards the light at the end of the tunnel, which is shining a lot brighter with the reduced political uncertainty and recent vaccine news. Although the good news on vaccines comes now with a diminishing marginal impact following initial burst of positivity. The big kicker has been the vaccines are higher than people expected in terms of efficacy. Giving equity markets more broadly the luxury of glossing over near-term risks and focussing on the prospects of vaccine rollout and activity normalising next year. Hence, we continue to remain constructive on a medium-term outlook and focus on using any corrections to add to reopening trades (E.g. Cyclicals, small caps, commodities, emerging markets - Countries whose economies have been hit hardest that will benefit most like Mexico (EWW), Brazil (EWZ), or Thailand (THD) where the pending reopening will have most delta. ). On the sentiment side, despite US indices perched close to all-time highs, complacency is far from records. Equity-fund flows have not been positive on the week since September and investors are still positioned for heightened volatility. The gap between 3-month and 1-month implied vol has climbed since the beginning of November as investors continue to price risk in the coming months with uncertainty over a fiscal package and a winter of COVID-19 weighs. Thus keeping the dollar down, emerging markets, commodities, stocks and cyclicals bullish trends in play. 

Of course, vaccine news doesn’t mean we are out of the woods. The rollout will be some way off and there are clearly hurdles to manufacture and deliver. The pending vaccine also doesn’t change the fact that in the immediate term there is huge community spread in Europe and US and shutdowns/increasing restrictions are incrementally ongoing. This will undermine the economic rebound, particularly in the US with no co-ordinated public health plan until the Biden administration takes office and the ongoing stimulus stalemate a hurdle, which has the capacity to roil risk assets in the short term. No doubt a challenging period ahead for the real economy.

Volatility and choppy price action weighed by factor volatility will remain, until there is more surety containment of COVID-19 but the rotation has begun, as we flagged last week. Positioning wise markets are looking ahead to the post-pandemic world, increased immunity and potentially a vaccine. The powerful cocktail of economic optimism returning and ever-flowing easy money keeping dip buyers ready to engage.

The stimulus impasse, expiring benefits and the continued acceleration of COVID-19 cases puts the onus back on the Fed to act. Fed Chair Powell wants inflation generated by aggressive fiscal spending, but he won’t get it yet with the likely Republican senate and the chances of deadlock easing in the lame-duck session are slim. The Fed must balance the immediate risks that are set to accelerate as COVID-19 continues to spread through winter and the potential for a vaccine in 2021. Although markets have reacted quickly, the real economy is a different story, in order to minimise labour market scarring and bridge the gap to a potential vaccine next year the Fed are likely to step up and increase size and duration of monthly purchases. The Fed will also be watching recent rise in long end of yield curve and may wish to slow down the pace of rise in 10yrs so as not to hamper recovery prospects whilst the US is still in the throes of virus wave two. Expansion of monetary policy measures will be no substitute for a decent fiscal stimulus package. However, the Fed may be left with few options if lawmakers cannot put their differences aside.

For pro-cyclical stocks there is more room for normalisation and these sectors can look past immediate risks through to benefits a vaccine can provide. Rendering opportunities to play the ‘economic reopening’ and cyclical rotation, adding assets that will be beneficiaries of economies reopening further next year (industrials, materials, miners, travel and leisure, energy etc., emerging markets - favoured EWZ, EWW, THD, small caps - IWM) Providing a relative opportunity for outperformance given the valuation starting points provide better outlook for gains, expectations have been low and can therefore surprise to the upside. Relative to growth/tech and momentum names that have front-loaded several quarters of gains. The best opportunities in the coming months are likely to come from those most leveraged to economic activity normalising that have low expectations like industrials, materials, travel and leisure, and energy. In addition, commodities with the trifecta of drivers supporting the outlook through to 2021 - Supply deficits, policy tailwinds from infrastructure spending and green electrification trends and on the macro side tailwinds from a weaker USD and rising inflation. We also remain of the view that Asia (China, South Korea, Taiwan, Thailand, Philippines all overweights) as a region will outperformmore on that here.

That is not to say to the ultra-long-term secular trend for technology and growth stocks is voided yet, but rather taking a breather. We have just witnessed years of disruption condensed into a 9-month period and those gains are well reflected in the way the sector has traded, with gains very much front-loaded. Expectations are high, positioning is extreme and rising yields will weigh. Economic optimism works against the long duration tech trades, and supports pro-cyclical allocations, where there are opportunities for catch up. So the question really depends on investment horizon.

In the long run a vaccine is no panacea for long-term growth and the secular mega trend of growth stocks not going anywhere unless we transition to more MMT-lite style regime that might have come with the blue wave scenario - off the cards now. Without that aggressive fiscal shift, the onus is on central banks, and the trend of slower, lower growth and productivity will resume beyond the initial rebound in economic activity. Long term inhibitors to growth like spiralling inequality which have been supersized by this crisis and resultant policy responses remain. Perpetuating zombie companies and killing productivity, fuelling everything K shaped. And within this everything K-shaped paradigm, mounting social unrest and populism remains part of the picture. Thus, the aforementioned collectively promoting an eventual return to lower potential growth and secular stagnation.

This means that taking a longer term view, beyond the initial optimism that comes hand in hand with a vaccine and post COVID rebound, until there is a serious shift toward demand side inflationary policy and redistribution the secular growth trend remains intact for now, though is under threat with the growing focus the pandemic brings on inequality.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.