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Stocks Need Trillion-Dollar Boost

17 July 2020

Risk appetite is recovering slightly after what has been a relatively choppy trading week. Most Asian benchmark stock indices are pushing higher, paring Thursday’s losses, with European and US equity futures in the green as well. Oil prices are persevering above the $40 line, while Gold has moderated just below the psychological $1800 level.

This week’s market performance suggests, yet again, that investors have serious misgivings about adding significantly to equities’ Q2 gains. Suspicions over the stock bulls’ outlook could be gaining critical mass. The fact that the S&P 500 has now been rejected twice around similar levels where it began the year, indicates that US stocks need fresh reasons to add to its 47.3 percent surge since its March trough.

Year-to-date parity could be as good as it gets for the time being, until fresh tailwinds arrive.

With Wall Street banks stockpiling $35 billion last quarter for loan-loss provisions, US weekly jobless claims remaining stubbornly high, and major corporations having warned that tens of thousands of employees could be laid off later this year, perhaps equity bulls are finally taking stock of the potential slip-ups in the US economy’s recovery.

Yet, salvation could be just around the bend.

Further fiscal stimulus could give the bull market fresh legs, with equities having already priced in the unprecedented monetary policy support. EU leaders are meeting in Brussels today to hold two days of talks over the proposed EUR750 billion recovery fund. A growing consensus at the negotiating table could spur more risk-taking activities over the near-term. Investors are also monitoring what else US Congress has to offer to support the world’s largest economy, with the opening bid for the next stimulus package potentially being tabled as soon as next week. The next round of US fiscal stimulus is estimated to be around $1 trillion.

Should fiscal policymakers disappoint, and deny stock bulls the boost they desire, we could see the rapid erosion of stock markets’ gains from recent months.



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