The week in the financial markets begins with a new wave of optimism and the purchase of risky assets. Analyst and Lead Financier, Vladimir Stefanov shares his opinion on this matter.
Unexpected growth amid the previous downturn
Some Asian indices have hit record levels this morning, while the Asia-Pacific MSCI excluding Japan is up 1%. At the same time, the Nikkei 225 settled at 29-year highs, says Vladimir Stefanov. S&P500 and Nasdaq100 futures are up 0.6% and 1%, respectively.
The alertness of the markets by the end of last week significantly decreased after the data on the inflows of funds from individuals, close to the record, were published. The activity of retail investors has been a powerful driver of the indices’ growth in previous months and the news that this driver is still in force is pushing the stock markets to the top again.
Observers also draw attention to massive liquidity injection programs by central banks. Liquidity and extremely low bond yields around the world are pushing investors from bonds to stocks. However, interest in the retail sector is a very unreliable factor.
Vladimir Stefanov noted that a deterioration in US consumer sentiment and business sentiment in Europe was reported last week. All this is due to the increase in the incidence of coronavirus in these regions and affects the sectors that are most important to them. Very quickly, players can switch from buying to selling if stocks stop generating profits. Such investment is more like gambling with an attempt to invest in big names or the selection of oversold shares in the expectation of a rebound.
What to expect for the foreseeable future
Markets have enjoyed strong retail demand following a historic stock crash in the spring. There are big questions about how robust demand for stocks will be near record highs. An additional challenge for long-term investors is to increase the yield on long-term government bonds, which somewhat increases the attractiveness of their purchase.
Vladimir Stefanov recommends that it would be reasonable for short-term traders to see how the US indices behave near the highs. A new turn to the decline this week will conclusively reaffirm that the markets are dominated by selling on gains, which could have widespread implications for a variety of assets. Uncertainty about what is happening also surrounds the euro-dollar currency pairs, but this only applies to short-term prospects.
Maintaining positive dynamics
Futures on the S&P500 and Nasdaq maintain a moderately positive trend, returning to the area of historical highs around 3600 and 12500, says Vladimir Stefanov. At the same time, the dollar is breaking through to the lowest level in two and a half years.
It is worth noting that the US currency and US stocks often move in opposite directions. Their inverse correlation can be considered stable because depreciation of the dollar increases the competitiveness of local exporters and increases revenue in dollars at a fixed income of corporations.
In the previous four years, we have often seen a different relationship, with both stocks and the dollar showing growth at the same time. This influx into US assets was linked to Trump’s tax reforms and heightened alertness to emerging markets, which were constantly subject to sanctions and trade restrictions.
Now the strength of the American currency is in question for several reasons. First of all, Biden has promised to reverse most of Trump’s tax breaks. Also, the predominantly Republican Congress is likely to block proposals to raise taxes for corporations and wealthy Americans, while discouraging new tax cuts.
Another important issue raised by Vladimir Stefanov is trade disputes. Markets put hopes in the quotes for a decrease in the degree of negotiations, primarily with China. This strengthens the yuan’s rally against the dollar. At the beginning of the new week, the American currency rate dropped to 6.55 yuan, i.e. to the lowest since June 2018 after the largest weekly gain since early 2019.