Asian stocks are moving higher after US stocks avoided falling for a third consecutive day. The buy-the-dip mantra helped tech stocks pare most of their losses from earlier this week, with the Nasdaq 100 moving back closer to the 14,000 psychological 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 Russell 2000 outperformed its blue-chip peers. Still, US futures are inching lower at the time of writing.
It is only natural to expect markets to take a breather after posting a string of record highs this 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 which extended 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 still has more upside
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 would not scuttle the global economic reopening. 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 earlier this week, especially if virus-curbing measures stay enforced for longer and delays our collective move into the post-pandemic era.
Markets had clearly been front-loading much of their optimism surrounding the global economic reopening, but what we’re learning is that the journey is far from a straight path. Investors and traders are set to continue reacting to such ebbs and flows, even as they maintain the overall upward tilt for risk assets, barring a material change in the global economic outlook.
Earnings outlook to dictate stock market’s near-term performance
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 higher for US indices, and whether the Q1 performance has justified recent gains.
Netflix’s plunge on Wednesday shows that market participants have little qualms jerking back valuations that have clearly extended well beyond its fundamentals.
Lagarde comments in focus as ECB leaves 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 likelier 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 accelerated 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 currency to add to its 2.7% in gains versus 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, would be sieved by potential clues about the ECB’s policy bias.
However, should a dovish Lagarde place more emphasis on the downside risks while stressing the need for those ramped-up asset purchases to be extended into the second half of 2021, that could prompt the shared currency to unwind recent gains and give up the 1.20 handle against the dollar for the time being.