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November 23, 2020

Vaccine progress is trumping bad economic news

Investors have made up their minds: For the time being, vaccine euphoria is outweighing bad economic news triggered by coronavirus restrictions.

What's happening: Drugmaker AstraZeneca announced Monday that its experimental Covid-19 vaccine is highly effective in large scale trials — the latest of several vaccine trials to post promising results this month.

US futures and stocks in Europe ticked higher in early trading. Last week, the S&P 500 and Dow registered modest losses, while the Nasdaq Composite rose slightly.

But markets will have to sort through two competing impulses in the coming months. Monday's gains come despite a harrowing outlook for coronavirus cases and new data that shows related restrictions are taking a toll on the economy.

In Europe, which has enacted strict lockdown measures in recent weeks, the composite Purchasing Managers Index from IHS Markit — a closely-watched gauge of the manufacturing and services sectors —has hit a six-month low.

Declines, which in October were isolated to the services sector, are now also affecting industrial output.

"The eurozone economy has plunged back into a severe decline in November amid renewed efforts to quash the rising tide of Covid-19 infections," said Chris Williamson, chief business economist at IHS Markit. "The data add to the likelihood that the euro area will see GDP contract again in the fourth quarter."

While the November contractions aren't as severe as those seen this spring — in part because economic output hadn't fully recovered from the last plunge — they could still prove damaging.

It's a warning to the United States, where policymakers are grappling with how to handle soaring cases and record hospitalizations from the virus. At least 83,870 Covid-19 patients were hospitalized Sunday — the 13th straight day the US has broken its record, according to the Covid Tracking Project.

JPMorgan's chief economist Bruce Kasman said these shifts will inevitably hit global growth, slowing the overall recovery.

"With the US and Europe now projected to contract and with the pandemic worsening, the rest of the world is likely to buckle," Kasman told clients Friday.

So why are risky assets like stocks rising? Looking at Europe, Florian Hense of Berenberg Bank offers three explanations. The setbacks have been largely priced in, he said, and while the near-term outlook in the region isn't good, it hasn't gotten worse (the same can't be said for the United States). Meanwhile, the medium-term outlook has only gotten more positive, bolstered by "calmer US foreign and trade policy [and] vaccine progress."

He also noted that according to the IHS Markit survey, business expectations for the next 12 months recovered most of the slump seen in October, and are at their second highest level since February.

Investors have been looking ahead to 2021 for some time. For now, alarm about this winter isn't changing the focus.

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