Risk,StocksandEMH

When we had written yesterday that the irrational exuberance for the vaccine should be taken with a grain of salt, we were not sure in what time frame this sagely advice would come true. But it would take only a day for the doubts to emerge on the vaccine’s efficacy, which has taken us by surprise. The Dow Jones is down by 1.5% after the steep rally on Monday.

Some of the points which were contested about the vaccine claim were the age profile of the participants, longevity of the immune response which it generated, and the impact on the other participants in the study apart from the eight successful cases which developed antibodies. As there are multiple pharma companies working on the vaccine for the virus, these first order queries should form a basis of questioning when one week down the line any other company makes an equally startling announcement about the ultimate cure. But wait a minute, isn’t the long form questioning going against the grain of market functioning?

We have previously discussed at length the Efficient Market Hypothesis in our columns. The theory tells that the market has to instantly assimilate any new information so as to not present any information-related arbitrage going forward. That’s why the ticker is constantly humming with incoming news. The theory also suggests that markets also develop a discount factor applicable on any new news through a self-correcting mechanism in due course i.e. the way it will assimilate the news. The most pertinent recent example we can think of was when the current US President took charge and started communicating with markets through his Twitter account. The markets initially used to gyrate with every tweet but eventually reconciled and discovered a steep discount factor.

With optimism on a vaccine dwindling the risk off assets are likely to make a come back. US yields have come down, the 10 year yield is now trading at 0.70. Gold has moved up and the Japanese Yen has strengthened. Emerging market assets are expected to be impacted on the downside.

In other important news the Euro has strengthened on the news that a 500 bn Euro fund is being readied to support the Eurozone economies battered by the virus impact. It is currently trading at 1.0940. In China, PBOC has kept the benchmark lending rate constant. The one year LPR stands at 3.85% while the five year LPR stands at 4.65%. Markets expect that it is more of a temporary pause in the rate cycle as the economy would need further easing measures in coming days.

The Indian rupee trades around 75.60 in the opening trade. Stock markets have opened in the green.