Investor sentiment improves despite renewed lockdowns

Between the reimposition of economic lockdowns and an array of positive news about a possible vaccine for Covid-19, markets are in for a choppy ride — but the ultimate outcome should be positive, says TD Economics.

In a new report, the bank’s economists assess the impact of recent pandemic trends.

On the downside, rising infection rates in numerous countries, including Canada, represent negative news in the short term, particularly as lockdowns are being reintroduced.

“The next few months will be tough and surging infection and hospitalization rates will slow economic growth into early 2021,” the report said.

Conversely, several major vaccine development efforts are apparently bearing fruit, raising hopes for an effective prophylactic against Covid-19 in the months ahead.

At the same time, the apparent U.S. election results — a Democratic president tempered by a likely Republican-controlled Senate — also represent a net positive for markets, the report said.

While these conflicting trends point to “a bumpy ride in the weeks ahead, the net result should continue to favour risk assets,” TD concluded.

Already, the positive side of recent events has bolstered investor sentiment, TD said, prompting rising U.S. stock markets and declining volatility.

In the short term, economic growth will likely be harmed by tougher public health restrictions, but “financial markets are forward-looking and focused on the light that is now shining at the end of the tunnel,” TD said.

This improved sentiment is also pushing government bond yields higher, TD noted.

“As the post-pandemic world becomes evermore clear, markets will likely continue to push yields higher,” the report said.

This will prompt both the U.S. Federal Reserve and the Bank of Canada to try to manage the transition to a higher-yield environment that “won’t choke the recovery or stretch the economic scars,” TD said.

Even though interest rates are seen remaining at current rates for several years, “vaccines in 2021 will mark the start of the next chapter for the Fed and BoC,” the report concluded.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.