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‘Scary’ Winter of Lockdowns Cools Market Elation Over Vaccines

Gregor Stuart Hunter
·3 min read

(Bloomberg) -- The escalating pandemic is chipping away at the burst of vaccine optimism that propelled global stocks to a record.

Social distancing is being stepped up in the U.S., Europe and Asia, darkening the outlook for the global recovery and underlining the importance of policy support. Against that backdrop, a public spat between the Trump administration and the Federal Reserve over emergency lending facilities unnerved investors Friday, prompting a slide in U.S. stock futures.

Looking further out into next year, many strategists expect global stocks and Treasury yields to climb as promising vaccine candidates are rolled out -- but few anticipate an easy return to normal.

“While there is light at the end of the tunnel there is still a long, dark, scary tunnel to get through before we emerge,” said Benjamin Jones, senior multi-asset strategist at State Street Global Markets in London.

Five charts sum up the short-term concern and longer-term hope in markets.

Booster Needed

Signs of division between the Trump administration and the Fed over emergency lending facilities sent S&P 500 futures briefly tumbling Friday, showing how sensitive markets are to stimulus. Further delays in fresh U.S. fiscal relief would increase economic risks, said Tai Hui, chief Asia market strategist at JPMorgan Asset Management.

Haven in Demand

The yen strengthened as euphoria around vaccines faded. “The idea of a major yen rally sits uncomfortably in a vaccine-powered global recovery, but maybe that just means we will see the yen rally on days when we aren’t feeling optimistic, and go sideways on days when we are,” Kit Juckes, chief foreign-exchange strategist at Societe Generale SA, wrote in a note.

Recession Odds

On one measure, the market is currently pricing a 3% implied probability of a U.S. recession within the next year, but some might argue it should be higher. “More lockdowns look imminent, and it’s not too much of a stretch to imagine that the global economy is likely to dip deeper into recession,” said Eoin Murray, head of investment for international business at Federated Hermes Inc.

The Missing 1%

The 10-year Treasury yield failed to breach 1% as many expected following positive vaccine news. That’s an indication investors still see the need for low rates for a prolonged period as the pandemic delivers fresh economic blows. “A depressed path for U.S. short-term interest rates will act as an anchor on longer term Treasury yields,” Alpine Macro strategists wrote in a note.

Eventual Escape

Despite immediate concerns over fresh lockdowns, the prospect of vaccines being rolled out over 2021 continues to underpin a more bullish longer-term narrative. Citigroup Inc.’s Global Risk Aversion Index, a combination of market indicators across asset classes and geographies, has fallen back into negative territory for the first time since the pandemic roiled markets.

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