Election results and vaccine hopes buoyed market sentiment in early-November even as the pandemic continued to worsen in many countries. It took four days to declare Biden president-elect and even though Trump still hasn’t conceded, markets are discounting an upending of the election result. And with Republicans likely holding onto the Senate, investors are betting on more market-friendly policies than a Democratic \u201cblue wave” might have produced. Treasuries rallied post-election but sold off again as positive vaccine trial results boosted growth prospects. US and global equities jumped sharply on the news that an effective COVID-19 vaccine might be just months away.<\/p>\n
But until a vaccine is widely available, governments face a tough balancing act between containing the virus’s spread and keeping the economy open. Policymakers in the UK and Europe have re-imposed lockdown measures that aren’t as restrictive as in the spring but will nonetheless shift the recovery into reverse in Q4. Authorities in Canada and the US haven’t been willing to go as far, though record case growth and rising hospitalizations suggest further restrictions might be needed. In any case, both countries’ economic recoveries are slowing in the fourth quarter.<\/p>\n
Governments have extended some support programs to manage the economic fallout of renewed containment measures, and a number of central banks are doing their part by providing additional stimulus. The ECB signaled more support will be coming in December, which we think will include an expansion of its QE program. The BoE expanded its own asset purchases, and we think negative rates remain on the table for early next year. Not to be outdone, the RBA cut rates slightly and launched a new QE program that goes beyond its existing yield curve control policy. Both the Fed and BoC stand ready to add stimulus if necessary, but seem content with the accommodation they’re providing at this stage. Central banks focused on keeping borrowing costs low will have a watchful an eye on rising yields, but might be reluctant to push back against modest increases that reflect improving economic prospects.<\/p>\n