Chief Market Strategist at FXTM
Equities
are moving higher in early Asian trade after a robust performance from Wall
Street on Wednesday. US equities not only ended the session higher, but the
S&P 500 is making an attempt to break out of the consolidation zone it has
been stuck in for more than five weeks. Other risk assets also received a
strong boost, with Brent Crude climbing to April highs, copper rallying 1.7%
and commodity currencies higher against the US dollar. That typically looks
like a global risk-on mindset.
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While
there is no specific data release backing the markets, news of countries across
the globe gradually loosening their lockdowns and early positive signs for
vaccine development seem to be working some magic. WHO concerns about a rising
number of Covid-19 cases that have reached a new record of 106,000 on Tuesday
haven’t seemed to impact the bullish mode, as the market is currently more
focused on the bright side of the story.
Quantitative
investors will have challenging times ahead. Traditional models and valuation
metrics are of little use anymore. It is not a secret that earnings will be
severely hit over the next two to three quarters and that many valuation
metrics have reached levels not seen before. We are certainly in different
times, hence we need to think differently.
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The
increase in fiscal spending and monetary policy stimulus are
unprecedented. After passing a $2
trillion economic relief package, the Senate may soon be revealing a bigger
one, after Republicans and Democrats reached a middle ground. The Fed’s balance
sheet has reached $7 trillion, almost $2.8 trillion higher from where it began
in 2020 and the world’s most powerful central bank may still implement further
easing measures, according to the latest minutes from the FOMC.
So,
the questions we need to find answers for are:
Will
the stimulus measures be enough to allow investors to forgo two to three
quarters of terrible earnings and economic damage?
How
much activity will return over the next several months?
Will
there be a second wave of infections leading to new lockdowns?
Are we
going to get a vaccine or treatment by year-end?
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Only a
crystal ball can find answers to these questions, so what we are likely to see
over the upcoming weeks and probably months is investors acting upon
narratives. In my opinion, the markets are currently reflecting the best-case
scenario and let us hope they are correct. It is great to be optimistic about
the future, but there are a lot of reasons to be cautious. For bullish
investors, considering some downside protection sounds like a good strategy at
this stage.
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