Walking In A Winter Wonderland?

'Markets are stuck in 'Macro Purgatory'. I really liked this;

It's an excellent way to summarise the current state of the markets.

This past week has seen a barrage of good vaccine news.

Moderna - 94.5% effective in preventing COVID-19 based on interim data from a late-stage trial. Oxford - Vaccine shows a strong immune response in adults in their 60s and 70s.

Pfizer - 90% effective. Applied for FDA first approval on Friday. If the FDA authorisation comes in the first half of December, Pfizer and BioNTech say they "will be ready to distribute the vaccine candidate within hours".

And there's still more to come;

We seem to have reached 'vaccine fatigue' now, with each new headline met with increasing indifference.

The vaccine(s) are pretty much ready to roll, the cold storage issue is not a show-stopper (alternatives are available), and vaccinations might even begin in early-mid December.

So that's the vaccine rollout covered. The finish line is in sight.  

Any further vaccine news will likely be ignored (unless it's negative).

And that seems to be the recurring theme across the board.

Will Trump Concede?

If he does, will that really send markets higher?

If he doesn't, and he actually does have a path to stay in power via the SCOTUS...

Wouldn't that be perceived negatively by markets?

What if he actually produces evidence of voter fraud?

Surely either of these outcomes would spark uncertainty.

Brexit - Deal Or No Deal

No deal headlines are being routinely ignored now, with the base case that risks are too great not to reach a deal.

Recent headlines have been pretty positive on this front too, with mention of a deal being '95% agreed'.

Wouldn't the markets be shocked if talks fell apart at this point?

Length of lockdowns

The intermittent cycle of lockdowns followed by easing measures is bound to continue as case numbers rise and fall.

It looks increasingly likely that we will be given a free pass for the Christmas period.

It doesn't end there though. What about 2021?

How long can businesses keep plodding on?

This question is especially relevant to SME's and those in any kind of leisure-related industry.

One example - Catering companies are going to have a miserable Christmas period - no annual Christmas party bonanza - maybe next year?

The EU recovery fund - still at loggerheads over laws and economic coercion.

Soros urged the EU not to back down last week;

Many in EU parliament agree with him 

Again, European equities (and the euro) have been remarkably resilient against these 'negative' headlines.

Over in Washington, stimulus talks haven't progressed in months.

The same differences remain.

Deomcrats need to abandon hope of a larger bill to have any chance of passing covid relief/stimulus through the republican senate.

Dems could still take the senate majority in a two-seat Georgia run-off in January, although it seems unlikely.

Will they hold out until next year?

A stimulus package of $1 trillion has been largely expected for some time.

If this is delivered will we see markets rally on the news or sell the fact?

Some safety nets are being removed;  

Chancellor Sunak appeared on Andrew Marr's show today, announcing £3bn extra for the NHS, whilst warning that people will soon see an "economic shock laid bare".

Yes, markets are forward looking, but when they look forward now, what do they see?

Actually, let's rephrase that.

Where is the next 'good news' catalyst coming from?

Maybe I'm suffering from a lack of imagination (although I usually have the opposite problem), but I just can't see where it's coming from.

Yes, the ECB has promised another big bazooka in December.

The Fed may yet feel the need to do more.  

None of this will surprise anyone.

Which leads me to ask... Is all (or most) of the good news priced in?

If this is the case, then how is sentiment and positioning?

Pictures (yes pedants, some are tweets) that tell a thousand words.  

JPMorgan are now forecasting negative (U.S.) GDP for Q1 (although they expect a return to growth in the following quarters).

Goldman Sachs analysts have revised their Q1 GDP forecasts lower (to 1% annualised vs 3.5% previous). They go on to say;

So, the worse things get, the better they'll become?

I try to maintain an optimistic outlook, but that's a bit much!

It does illustrate the point I wanted to make though.

Back in April, I wrote this;

Basically, everyone was calling 'the end of the world', and then stocks started rallying from the lows.

My argument back then was that everything bad was 'known' so it was unlikely that markets could be shaken further.  

(There was plenty of bad news, but nothing was unexpected so markets ignored it.)

We've had an abundance of good news, and the recent doses of vaccine optimism have had a diminishing impact.

I think the opposite may now apply, with a caveat.

Caveat: I still believe that stocks will head higher, but I think a pullback is coming.

Heading into year-end, I think there will be caution to add to riskier positions, heading into greater uncertainty.

Markets are currently more susceptible to negative shocks than positive ones, retail sales are slowing (maybe they'll get a Black Friday boost), initial jobless claims ticked up again last week, and JPMorgan has aired concerns about a spike in permanent job losses.

To me, it just makes more sense to look for short risk opportunities over the coming weeks from a risk:reward perspective.

On top of everything else, Bitcoin could hit 300,000 to 500,000($) depending who you believe.

Tomorrow, we'll get the week underway with flash PMI's and not much else.

The consensus for French PMI's is particularly weak so little chance of a downside surprise there.

Germany is the one to watch.

Manufacturing strength has offset some of the weakness in services, so a miss in this sub-component would be a bigger deal than a miss in services.

Either way, the 'stories' about new orders, employment trends etc. in the reports are more interesting and relevant than the headline numbers.

Expectations in the U.S. are a little higher, with only a slight softening expected.