The markets have spent the first half of the day digesting the recent gains. European stock indices have retreated slightly, causing US index futures to decline ahead of US data dump and Thanksgiving Day on Thursday.
Investors will be giving a lot of thanks also to the scientists who have made incredible progress in developing effective vaccines, and in doing so helping to fuel a sharp rally that saw the small-cap Russell 2000 index hit a new record and the Dow topped 30K for the first time ever on Tuesday. Also boosting sentiment has been news of Janet Yellen's selection as President-elect Joe Biden's Treasury Secretary nominee, while the publication of stronger US economic data has reduced fears over a sharp drop in economic activity as a result of the latest lockdowns. It will be interesting to observe today’s publication of several US macro pointers and how the markets will respond. Among other things, we will have the latest jobless claims data, the second estimate of GDP, new home sales and personal income and spending numbers. Later on in the day, the FOMC’s last meeting minutes will be published at 19:00 GMT.
So, investors are hopeful that the vaccines will be distributed in early 2021 and this will give rise to pent-up demand as consumers and businesses look forward to more normal times ahead.
While all this is well and good, it looks like the markets are under-pricing the risks of the long-term damage of the pandemic on the world economy. This is something that could come back to haunt investors in the months ahead.
Many businesses have closed down for good and many jobs will never return. Homeowners might struggle to pay their mortgages when government support is lifted, causing some to lose their homes and push down house prices, trapping some in negative equity. What’s more, governments worldwide will have to raise taxes to recoup the amount of money they have splashed supporting the economy during lockdown. In the US, the new administration is likely to raise taxes on corporations, and Biden will not be as obsessive as Trump in trying to pump the stock market. Furthermore, the Republicans in the Senate they will provide stiff resistance to Democratic efforts of introducing a large stimulus package.
So, there are plenty of risks that are perhaps not priced in. But right now, sentiment is positive, and momentum is bullish. As short-term traders, we must respect that and go with the momentum rather than against – until the charts tell us otherwise.
Source: ThinkMarkets and TradingView.com
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