By Hussein Sayed, Chief Market Strategist at FXTM
Stock markets are forward-looking by nature. Investors evaluate a company’s price today based on reasonable expectations about its future earnings and cashflows. That’s where the ‘discounting mechanism’ term is derived from as stocks tend to discount as much upcoming news and events as possible.
The latest bout of vaccine news is a classic example as this news has managed to take US equities to record highs, and with it several Asian equity benchmarks.
Indeed, the future does look optimistic and we are more confident the pandemic is coming to an end. However, in the near-term, we will continue to struggle with when and how much damage will occur before this return to pre-pandemic life.
As long as this uncertainty prevails, investors should expect bumps along this road to recovery, especially since markets have already priced much of the good news.
New York City’s announcement on Wednesday that it was closing schools again overshadowed Pfizer and BioNTech news that their vaccine had efficacy of 95%.
After kicking off the session in green, all US major indices declined with the S&P 500 dropping by more than 1% for the first time since October. Treasury yields fell slightly with 10-year yields remaining above 0.85% and the Dollar nudged marginally higher.
That said, none of this represent signs of excessive risk aversion. Given that equities are the asset class that have priced most of the positive news, they are also expected to be hit the most whenever we price new negative information.
Unfortunately, new highs in hospitalised Covid-19 patients in the US and positive testing at a six-month peak, both point to more deaths due to the virus. While a full lockdown is not on the cards yet, the risks of other US states following actions in New York as winter becomes harsher need to be taken into consideration.
We will not know the economic consequences for several weeks, but clearly activity will slow significantly. That’s when US politics will come back into focus and stimulus talks will become more market-moving than vaccine news.
With US President Donald Trump continuing to focus on fighting election results and neither Democrats nor Republicans showing signs of reaching a middle ground, it does not seem likely that a stimulus package will be delivered soon. Will it take the reinstating of lockdowns by state and local governments to speed up the talks?
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