Tue, May 18, 2021 @ 11:25 GMT
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Stocks Post Record Highs Galore

  • Dow futures edging higher.
  • Fed speak soothes stocks, Treasury yields.
  • Road ahead still bumpy.

US equity futures are pushing up to new highs at the time of writing, amidst the risk-on party in global equities. The MSCI ACWI index, which measures stock markets in both the emerging and developed world, also posted a new record on Thursday having climbed 7.2% already so far this year. However, Asian stocks have been diverging from their global peers of late.

The fall in US 10-year Treasury yields by some 15 basis points from the March 30 high has made for a conducive environment for stock market gains. Notably, the VIX index has reached its lowest point since February 2020, before the Covid-19 pandemic rocked global financial markets.

Fed flute plays a calming tune

The dovish Fed speak this week has played its role in soothing markets, as policymakers reiterate that they’re in no hurry to adjust their accommodative stance. Fed Chair Jerome Powell once again sought to assure market participants that the central bank has enough tools at its disposal to contain inflationary pressures if they get out of hand. Amid green shoots in the US economic recovery, Fed officials have repeatedly said that any inflation overshoot is expected to be transitory.

Yesterday’s higher-than-expected US initial jobless claims is another reminder that the US economy will need “some time” to make a full recovery. The pace of declines in the weekly continuing claims is also slowing down and is still double what it was compared with pre-pandemic levels.

As long as investors believe they can rely on the Fed’s conveyed intentions surrounding their policy outlook, that should roll out a longer runway for gains in risk asset. As we know, markets don’t like surprises. Hence it is up to the Fed to ensure that it can properly telegraph any policy adjustments including the eventual tapering of its asset purchases, or risk roiling markets once more.

Earnings up ahead

Volatility could pick up next week when another US earnings season kicks off. Markets are expecting another strong quarter, as the US economic recovery feeds into corporate America’s top and bottom lines which should translate into more gains for equities.

However, that isn’t to say that it’s all smooth sailing from here. Amid such hyped-up expectations, any major negative surprises or disappointing earnings guidance could see investors’ shoulders slump. The persistent hold of Covid-19 on major economies along with uneven vaccination rates could curtail the pace at which the world economy can return to pre-pandemic levels. Another unexpected surge in Treasury yields could also shatter the market calm at present, as the Fed’s policy outlook remains open for interpretation.

While stock market gains may seem there for the taking over the near term, investors must remain vigilant over the potential risks ahead.

 

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