What is driving risk assets higher?

Equities are moving higher in early Asian trade after a robust performance from Wall Street on Wednesday. US equities not only ended the session higher, but the S&P 500 is making an attempt to break out of the consolidation zone it has been stuck in for more than five weeks. Other risk assets also received a strong boost, with Brent Crude climbing to April highs, copper rallying 1.7% and commodity currencies higher against the US dollar. That typically looks like a global risk-on mindset.

While there is no specific data release backing the markets, news of countries across the globe gradually loosening their lockdowns and early positive signs for vaccine development seem to be working some magic. WHO concerns about a rising number of Covid-19 cases that have reached a new record of 106,000 on Tuesday haven't seemed to impact the bullish mode, as the market is currently more focused on the bright side of the story.

Quantitative investors will have challenging times ahead. Traditional models and valuation metrics are of little use anymore. It is not a secret that earnings will be severely hit over the next two to three quarters and that many valuation metrics have reached levels not seen before. We are certainly in different times, hence we need to think differently.

The increase in fiscal spending and monetary policy stimulus are unprecedented. After passing a $2 trillion economic relief package, the Senate may soon be revealing a bigger one, after Republicans and Democrats reached a middle ground. The Fed's balance sheet has reached $7 trillion, almost $2.8 trillion higher from where it began in 2020 and the world's most powerful central bank may still implement further easing measures, according to the latest minutes from the FOMC.

So, the questions we need to find answers for are:

• Will the stimulus measures be enough to allow investors to forgo two to three quarters of terrible earnings and economic damage?

• How much activity will return over the next several months?

• Will there be a second wave of infections leading to new lockdowns?

• Are we going to get a vaccine or treatment by year-end?

Only a crystal ball can find answers to these questions, so what we are likely to see over the upcoming weeks and probably months is investors acting upon narratives. In my opinion, the markets are currently reflecting the best-case scenario and let us hope they are correct. It is great to be optimistic about the future, but there are a lot of reasons to be cautious. For bullish investors, considering some downside protection sounds like a good strategy at this stage.