It’s been a scintillating start to the month for global equity markets as investors put virtually every concern on the universal wall of worry behind them while reacting positively to coronavirus lockdowns being eased across the globe. The list of things the market cares about seems to dwindle – and you can add renewed concerns over US-China relations and anarchy in the streets in US metropolitan centers to that list.
The sublime level of policy support makes it increasingly challenging not to agree with the direction of travel.
Indeed, the market is in full-blown "liquidity-on” mode, with the S&P 500 leading the charge. Risky assets have powered ahead lately, and equities have taken the lead. It seems that potential headwinds – like a slower growth recovery, earnings disappointments, potential US tech regulations and rising geopolitical tensions – are being ignored. Instead, news flow around new stimulus packages and possible vaccine breakthroughs are greeted emphatically.
Wall Street is universally pessimistic, particularly on equities. Still, cross-asset positioning has rebounded significantly with base metals and now the currency market joining the foray, which has caught more than a few by surprise and probably forced a lot of hands.
And, thematically, whether you believe in the sustainability of growth to value shift or not, portfolios and model funds are moving enough that investors needed to adjust.
There have been signs of capitulation from large Wall Street players as the recent melt-up – especially in the less well owned cyclical/value names – began to cause excess pain.
And there is pain out there, with strength in cyclicals in particular, which tells the tale of the tape from a positioning perspective. There’s no singular reason for the move, although on top of the general positive lockdown easing narrative, expectations into ECB Thursday have also become more elevated.
Trying to fade recent moves has been a painfully unprofitable experience for investors, and I still think it remains a case of Wall Street being stopped in rather than stopped out when it comes to equities.
Thursday is shaping up to be one of the more interesting ECB meetings for a while, with debate continuing over whether they will expand the PEPP program's size. Yesterday, Market News International released an "ECB sources" piece which noted that "while some officials said a EUR 500bn+ expansion was possible on Thursday; most said the central bank was likely to keep its powder dry for the moment."
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Stocks recover as Fed Chair Powell says, "The job is not done"; Oil's raging bull and FX's roaring commodity currencies