And that is likely to emerge as the key trading theme this week
As we get into the start of trading this week, you can just about use the contrasting narratives that are playing out to describe how the market is behaving.
When the market switches to risk-on, it is all about vaccine optimism and easy money from central banks. When it is risk-off, it is all about negative virus developments, central banks turning more pessimistic, and fiscal hopes starting to fade.
Essentially, there is a push and pull in the market and that exemplifies the conflict that investors have to battle through amid the contrasting narratives. In short, this is still encompassed by the battle between the virus crisis and easy money for the most part.
With a lack of key economic data releases this week, expect the focus of the market to switch towards the narrative(s) above instead.
Tighter virus restrictions are coming through in the US and Europe, as cases continue to keep on the higher side. As such, more central bank easing is expected to fend off any negative market consequences but at the same time, fiscal aid is slowing down.
However, after the Pfizer news last week, Moderna is expected to provide more good news in the vaccine space some time this week and that could well keep investors hoping for more optimism going into next year.
Not to mention with the Fed and major central banks still flooding the market with ample liquidity (and perhaps more to come as the virus situation worsens in the US and Europe), and these supportive measures will be in place for a very long time.
As the risks from the US election recede and the market has little else to latch on to, the contrast and conflict from the prevailing narratives above are likely to emerge as the key trading theme this week and perhaps through to the year-end.
We're already seeing bits and parts of that today with equities holding gains though Nasdaq futures have eased a little, the dollar paring some of its earlier losses with key levels in-check, and the bond market more cautious with Treasury yields sitting lower.
Something has got to give eventually but for now, the battle between hope and fear is likely to set the tone in trading this week. The best one can do is lean on the technical levels to define and limit risk, read the tea leaves, and pick a side.
