Stocks pull back but vaccine optimism should keep the bears at bay

Investors are torn between expectations for a more normal future with the developments of vaccines, and the current situation with the rapidly spreading virus infections and lockdowns, causing more economic pain. Indeed, the start of this week has followed the script from last week, with the markets pulling back after rising sharply on the back of vaccine news and optimism about the future. As a result, sentiment appears to be only cautiously optimistic at this stage. This is reflected in the stock markets being unable to pull away more decisively, while haven assets such as gold and yen continue to hang around levels they were trading before Moderna’s vaccine headlines hit the wires on Monday.

The fact Donald Trump is refusing to admit defeat in the US presidential election and handing over power to Joe Biden is another worry the markets would rather avoid. It is not clear how Joe Biden would tackle the current virus situation in the US but the president-elect has warned that the longer Trump refuses to hand over power, the more lives could be lost. A number of US states, including California, Michigan and New Jersey, have already imposed new lockdown restrictions. The new restrictions come on the back of a record surge in virus cases, with the US reporting a million new infections during the first ten days of November. Experts warn that Thanksgiving and Christmas should be cancelled this year to help bring down the infection rate. Hospitalization has hit a new high, while the 7-day average of deaths has risen to levels not seen since the summer.

While it may be too early for the markets to turn lower decisively, don’t be too surprised if the indices stopped going further higher in the coming weeks. It could be that news of the vaccine may have already been priced in, after the markets staged a massive rally from their March lows. What’s more, positive news regarding the pandemic means less monetary support will be needed. Although central bank officials have so far not provided any hints that monetary policy will be tightened, forward-looking investors may start to scale back expectations over further QE and rate cuts in 2021.  

However, that is a slightly longer-term consideration. For now, optimism that there is now light at the end of the tunnel should help to keep the losses limited and the bullish trend intact. So, despite today’s weakness, I think that the bulls will remain in overall control of price action for risk assets. As such, I continue to think that the German DAX will probably hit a new all-time high, before staging a sizeable correction: