Economists at TD Securities prefer a defensive posture in the coming weeks in spite of the fact that vaccine news is a long-term positive as the market may be overestimating the timing and scalability of vaccine distribution. The USD has some room to tactically rally.
Key quotes
“No doubt that vaccines are a positive long-term, we think the market is overestimating the timing and scalability of its implementation. We attempted to capture this dynamic by evaluating how well long/short/stay-at-home equity ‘vaccine’ baskets have traded to the overall global MSCI index. On this basis, equity markets have overshot. There are two potential takeaways from this: 1) because of high efficacy rates, the market could be in the early days of moving to a trading environment that is less pandemic related; or 2) the broad market optimism has overshot reality and that the good news related to the vaccine race is already in the price. We are in the latter camp.”
“We think it might be a touch early for an equity rotation to take place towards growth/value, as these sectors are reliant on a pick-up in economic activity – a challenging proposition as outlined above. COVID-19 mitigation measures in both the US and Europe also exacerbate this issue. But insofar as markets are forward-looking and a vaccine implementation program is available sometime by mid-year 2021, this rotation might be more prudent sometime in the early new year.”
“As far as the USD is concerned, we think a modest 2% rally in the very short-term is reasonable. We are long USD/CAD in looking for a move towards the 1.33/35 zone before fading. We are also short a one-month 1.19/1.21 EURUSD call-spread as a slowing DM world and spike in COVID-19 are conditions that are not ripe for the common currency to achieve escape velocity. That said, we think 1.16 should be durable support.”
Share
