Show Transcript
Markets have been flirting with record highs as more and more positive COVID-19 vaccine news breaks. But even though there may be light at the end of the tunnel, have markets priced in just how long that tunnel could be? Kim Parlee speaks with Priya Misra, Global Head of Rate Strategy at TD Securities in New York.
Print Transcript
- There's a lot going right with the markets right now with many of the equity markets hitting record highs. We have effective vaccines and many effective vaccines out there. We also have the news of a smooth transition of power-- presidential power, that is-- in the United States. But at the same time, we have the pandemic raging on and the number of COVID cases rise in the United States.
Earlier, I spoke with Priya Misra. She's global head of rate strategy at TD Securities in New York. And I started off by asking her about something she has said. She talked about how the markets have priced in the light at the end of the tunnel, but not necessarily how long that tunnel was. Here's what she had to say.
- So the markets have seen the vaccine news, and I have to say that the efficacy rate that is reported in the trials came in much higher than what we were thinking it would be. We were hoping 60%, 70%. We get 95%. And so that's why I say that that light at the end of the tunnel, maybe at some point, the whole world can get vaccinated. But there's a lot of uncertainty between now and then. How easily is it distributed? It needs to be under this extremely cold temperature.
Also, how does it do for demographics of the trial participants that has not been released? So did it work as well among the older, more vulnerable population? The asymptomatic cases-- did it prevent that, as well? Because if I don't show any symptoms, but I go ahead and I spread COVID even after getting the vaccine, it's a lot less effective than what you would hope.
So I think we're still in that process of the question phase of the vaccines actually being deployed. And that's why I think the stimulus measures have to exist until we can see that that health care solution is actually here with us. And I think in that uncertain period, I think the markets are forward looking, and they're almost pricing in that vaccine. But in the here and now right now is that COVID cases are arising in the midst of a second wave right now.
- So let's talk about the here and now, because I want to get your sense on any concern about a double dip recession coming. You've got cases rising to your point of the vaccine is coming. We're waiting on stimulus, whether it's a pared down package. And you also have a new presidency coming in, which could clamp down with some COVID-19 measures. So when you factor all that in together, what do you see?
- Right, before the new administration, right now, we're actually very concerned about the rise in COVID cases. We're not seeing any reduction. It's an exponential growth. In Europe, we had the restrictions and there's some signs that it's had an impact, but there is an impact in Europe on economic data. And our view, our economists have a slowing down in the economy. We don't have an official double dip in the sense we don't have negative GDP in the next couple of months. But we do have a definite slowing in the labor market and inflation and consumer spending. I guess, a combination of both restrictions that the state governments are imposing, various states have put down some sort of restrictions-- localized restrictions.
But it's also the impact on consumer confidence, consumer spending. You know, there were studies done in April where people, even without the restrictions, decided to curtail spending and stay home. And we're seeing that in some of the mobility indicators. So we're nervous about the trajectory of the economy in the near term.
Then as you said, we've got a fiscal stimulus package that Congress has been debating this since July. So maybe I'm at this point cynical, but I don't know if you're going to get a deal between now and the new administration coming in on Jan 20. So if we don't get a deal, a lot of fiscal stimulus is expiring, a lot of the Fed programs have expired-- so we are nervous that the rise in COVID cases plus no fiscal deal can actually result in sort of this double whammy on the consumer.
Now once the new administration comes in, we're hopeful that we do get some deal. You talk about COVID restrictions-- I'm not sure that there'll be a lot of national COVID restrictions, but the states, I think, will respond, and they have been responding. But then we're going to be looking at what does the Biden administration do in terms of finding this common ground with the Senate Republicans to at least give maybe a trillion dollar fiscal package until we're on the other side and until the vaccinations are sort of ongoing. Can we get more fiscal or more monetary support-- I think that's going to be the focus for the market the next couple of months.
- It's interesting, because the market really has is priced that away-- equity market, I should say, in terms of what's there. So it will be interesting to see if anything bubbles up on that front. What about the 10-year right now? Because I know you pointed that out-- there's something interesting happening there. Tell me what you see and why that matters.
Right so I think that the 10-year has been pricing in that vaccine. We've been getting closer to that 1% level on the 10-year, which we haven't seen since COVID. And that's where the expectation is-- that if COVID is rising, there's downside risks on the economy, and we're not getting help on the fiscal side, I think markets are really focused on the monetary help. That is a very key Fed meeting coming up in a couple of weeks. The hope is that the QE program will get extended, and the length of what the Fed is buying will also get extended, so more accommodation from the Fed. And that may be one of the reasons why risk assets are being able to look past the rise in COVID cases, that you're going to get more monetary accommodation.
So what people often ask about-- the disconnect between equities and rates-- well, the Fed creates that divergence by allowing rates to be almost too low. They're keeping rates low, keeping accommodation in place. And that allows equities to go up. So we do expect the Fed to ease in December, but that would be another key of interest that's actually coming up in the near term.
- I've only got about 30 seconds left, Priya, but I want to ask you this. What have we not talked about that we should be talking about in terms of what you're watching right now?
- Well, there's also the LIBOR transition, which I think that's something which everyone should be aware-- LIBOR labor might go away. We've got a one year ticking window, despite all the headlines, that people should not be using dollar LIBOR or any other LIBOR. But beyond that, it's just the uncertainty of the year ahead and making sure that you have a diversified portfolio, because nobody could have imagined a year that we all just lived through. And there's still that uncertainty. I think we're still in the midst of a pandemic.
- Very true. Priya, thanks so much.
- Thank you.
[MUSIC PLAYING]
Earlier, I spoke with Priya Misra. She's global head of rate strategy at TD Securities in New York. And I started off by asking her about something she has said. She talked about how the markets have priced in the light at the end of the tunnel, but not necessarily how long that tunnel was. Here's what she had to say.
- So the markets have seen the vaccine news, and I have to say that the efficacy rate that is reported in the trials came in much higher than what we were thinking it would be. We were hoping 60%, 70%. We get 95%. And so that's why I say that that light at the end of the tunnel, maybe at some point, the whole world can get vaccinated. But there's a lot of uncertainty between now and then. How easily is it distributed? It needs to be under this extremely cold temperature.
Also, how does it do for demographics of the trial participants that has not been released? So did it work as well among the older, more vulnerable population? The asymptomatic cases-- did it prevent that, as well? Because if I don't show any symptoms, but I go ahead and I spread COVID even after getting the vaccine, it's a lot less effective than what you would hope.
So I think we're still in that process of the question phase of the vaccines actually being deployed. And that's why I think the stimulus measures have to exist until we can see that that health care solution is actually here with us. And I think in that uncertain period, I think the markets are forward looking, and they're almost pricing in that vaccine. But in the here and now right now is that COVID cases are arising in the midst of a second wave right now.
- So let's talk about the here and now, because I want to get your sense on any concern about a double dip recession coming. You've got cases rising to your point of the vaccine is coming. We're waiting on stimulus, whether it's a pared down package. And you also have a new presidency coming in, which could clamp down with some COVID-19 measures. So when you factor all that in together, what do you see?
- Right, before the new administration, right now, we're actually very concerned about the rise in COVID cases. We're not seeing any reduction. It's an exponential growth. In Europe, we had the restrictions and there's some signs that it's had an impact, but there is an impact in Europe on economic data. And our view, our economists have a slowing down in the economy. We don't have an official double dip in the sense we don't have negative GDP in the next couple of months. But we do have a definite slowing in the labor market and inflation and consumer spending. I guess, a combination of both restrictions that the state governments are imposing, various states have put down some sort of restrictions-- localized restrictions.
But it's also the impact on consumer confidence, consumer spending. You know, there were studies done in April where people, even without the restrictions, decided to curtail spending and stay home. And we're seeing that in some of the mobility indicators. So we're nervous about the trajectory of the economy in the near term.
Then as you said, we've got a fiscal stimulus package that Congress has been debating this since July. So maybe I'm at this point cynical, but I don't know if you're going to get a deal between now and the new administration coming in on Jan 20. So if we don't get a deal, a lot of fiscal stimulus is expiring, a lot of the Fed programs have expired-- so we are nervous that the rise in COVID cases plus no fiscal deal can actually result in sort of this double whammy on the consumer.
Now once the new administration comes in, we're hopeful that we do get some deal. You talk about COVID restrictions-- I'm not sure that there'll be a lot of national COVID restrictions, but the states, I think, will respond, and they have been responding. But then we're going to be looking at what does the Biden administration do in terms of finding this common ground with the Senate Republicans to at least give maybe a trillion dollar fiscal package until we're on the other side and until the vaccinations are sort of ongoing. Can we get more fiscal or more monetary support-- I think that's going to be the focus for the market the next couple of months.
- It's interesting, because the market really has is priced that away-- equity market, I should say, in terms of what's there. So it will be interesting to see if anything bubbles up on that front. What about the 10-year right now? Because I know you pointed that out-- there's something interesting happening there. Tell me what you see and why that matters.
Right so I think that the 10-year has been pricing in that vaccine. We've been getting closer to that 1% level on the 10-year, which we haven't seen since COVID. And that's where the expectation is-- that if COVID is rising, there's downside risks on the economy, and we're not getting help on the fiscal side, I think markets are really focused on the monetary help. That is a very key Fed meeting coming up in a couple of weeks. The hope is that the QE program will get extended, and the length of what the Fed is buying will also get extended, so more accommodation from the Fed. And that may be one of the reasons why risk assets are being able to look past the rise in COVID cases, that you're going to get more monetary accommodation.
So what people often ask about-- the disconnect between equities and rates-- well, the Fed creates that divergence by allowing rates to be almost too low. They're keeping rates low, keeping accommodation in place. And that allows equities to go up. So we do expect the Fed to ease in December, but that would be another key of interest that's actually coming up in the near term.
- I've only got about 30 seconds left, Priya, but I want to ask you this. What have we not talked about that we should be talking about in terms of what you're watching right now?
- Well, there's also the LIBOR transition, which I think that's something which everyone should be aware-- LIBOR labor might go away. We've got a one year ticking window, despite all the headlines, that people should not be using dollar LIBOR or any other LIBOR. But beyond that, it's just the uncertainty of the year ahead and making sure that you have a diversified portfolio, because nobody could have imagined a year that we all just lived through. And there's still that uncertainty. I think we're still in the midst of a pandemic.
- Very true. Priya, thanks so much.
- Thank you.
[MUSIC PLAYING]
