Share prices surge following vaccine news and Biden win

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Share prices surge following vaccine news and Biden win

• Initial market reaction to US election results is positive¬†
• Stock prices continued to gain ground following encouraging news about a vaccine, with bonds holding steady
• With cautious optimism about a recovery, ABN AMRO MeesPierson recently turned more positive on equities
 
With cautious optimism about the projected economic recovery, ABN AMRO MeesPierson last month turned more positive on equities, to a neutral position. The bank also turned more positive on the industrials sector (overweight), adding to its already positive position on health care. “Naturally, we continue to closely monitor the situation in markets and feel comfortable with our current positioning,” explains ABN AMRO’s Head of Investment Strategy Ralph Wessels. “The stock markets are being flooded with good news within the space of a week and a half. The uncertainty and risk premium factored into the markets before the elections are starting to disappear. During this time, for example, the VIX ‘fear’ index has dropped from 40 to 23. Our economic base scenario projects that markets will continue to struggle for the remainder of this quarter and the next. However, the global economic recovery will kick in during Q2 of next year – assuming of course that we will have a vaccine by the end of this year. Initially, that vaccine will be reserved for society’s more vulnerable members and for people in high-risk professions.”¬†

Financial markets

Reflection the uncertainty that presidential elections inevitably cause, the markets were nervous and volatile beforehand. However, as soon as it became apparent that the elections were proceeding peacefully, and the most likely outcome became clear – Biden winning the White House, with a divided Congress – equity markets turned positive. The rally was led by health care and technology stocks, as investors’ fears of tougher legislation and a reversal of the corporate income tax cut diminished. In bond markets, yields on 10-year US Treasuries dropped significantly. Market volatility came down after the result, but can easily emerge again as long as Trump does not accept his defeat. In addition, ABN AMRO MeesPierson thinks that investors will closely watch Biden’s political plans and his approach to dealing with the coronavirus pandemic. Biden’s policy proposals, including a massive infrastructure bill to accelerate the US economic recovery and to combat climate change, could have positive implications for equity markets, and the industrials sector in particular.

Headwinds

Also, US foreign policy is expected to become more predictable. While the trade tariffs on China are unlikely to be removed anytime soon, Biden will probably aim for a more constructive relationship with China, which would ease geopolitical uncertainty. Reduced trade tensions could benefit the materials and industrials sectors.

Encouraging vaccine news

The financial markets received further good news on Monday, when Pfizer and BioNTech announced encouraging test results for their Covid-19 vaccine. Although some questions about the study remain, this is close to the best-case scenario. Stock markets, oil prices and interest rates surged when the news was announced, although the rising interest rates had a negative impact on bond prices. Stocks that have suffered from social distancing rules – airlines, hotels, real estate companies, restaurants and retail – performed particularly strongly. However, highly cyclical sectors such as the financial and energy sectors also rose in response to the renewed hope for economic recovery with the vaccine.

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