Wed, Jun 23, 2021 @ 11:07 GMT
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Stocks To Endure Bumpy Journey To New Normal

  • Risk assets likely to carve out further gains amid reopening optimism.
  • Sentiment still swayed by pandemic developments.
  • Earnings guidance to influence near-term performance.
  • Lagarde’s policy cues could move euro.

Asian stocks are moving higher after US stocks avoided falling for a third consecutive day. The “buy-the- dip” mantra helped US tech stocks pare most of their losses from earlier this week, with the Nasdaq 100 moving back closer to the psychological 14,000 level at Wednesday’s close. The reflation trade was also evident in the mid-week price action, as gains in materials, energy and financials pushed the S&P 500 higher, while the small cap Russell 2000 outperformed its blue-chip peers. US futures are little changed at the time of writing.

It is only natural to expect markets to take a breather after posting a string of record highs earlier in the month. After all, technical indicators had been highlighting overbought conditions of late. But with the VIX index still around its long-term average, coupled with 10-year Treasury yields extending their April declines to now fall below their 50-day moving average, such metrics points to a conducive environment for further stock market gains.

Risk assets to defy persistent pandemic

Despite the worrying developments surrounding the pandemic involving major economies like Canada, Brazil, India and Japan, investors are still hopeful that this resurgence of Covid-19 will not scuttle the reopening of the global economy. Risk assets are expected to remain resilient in the face of the virus’s global resurgence even as new Covid cases hit a weekly record just last week, with the global vaccination campaign serving as the basis for such hopeful resilience.

To be clear, such concerns are expected to have a dampening effect on markets and may well trigger more pullbacks in the markets as witnessed recently, especially if lockdown measures stay enforced for longer and delay our collective move into the post-pandemic era.

Markets had clearly been front-loading much of their optimism surrounding the global economic recovery, but what we’re learning is that the journey is far from straightforward. Investors and traders are set to continue reacting to such ebbs and flows, even as they maintain an optimistic outlook, barring a material change in the global economic outlook.

Earnings outlook could dictate sentiment

Corporate guidance for earnings growth over the coming weeks is likely to have an influential role in determining whether US stocks can roar higher. Investors want to ascertain whether earnings prospects are bullish enough to warrant another leg up for US indices, and whether the first quarter performance has justified recent gains. Netflix’s plunge on Wednesday shows that market participants have little qualms about pushing back valuations that have clearly extended well beyond the fundamentals.

Lagarde in focus as ECB set to leave policy unchanged

The European Central Bank is widely expected to stand pat on its policy settings today, with ECB President Christine Lagarde’s press conference more likely to offer up new clues that markets can latch on to. Investors will be eager to know how much runway is left for the ECB’s emergency bond-buying programme which was ramped up last month, before the central bank starts paring back its purchases.

Any hawkish hints emanating out of Lagarde could spur more gains for the euro, allowing the bloc’s currency to add to its 2.7% gains versus the US dollar so far this month. Lagarde’s commentary over the vaccination efforts across the region and also the prospects of joint fiscal stimulus buffering the EU’s recovery prospects may give us potential clues about the ECB’s future policy bias.

However, should a dovish Lagarde place more emphasis on the downside risks while stressing the need to maintain those ramped-up asset purchases into the second half of 2021, that could prompt the single currency to unwind recent gains and relinquish the 1.20 handle against the dollar for the time being.

 

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