By Han Tan, Market Analyst at FXTM
Asian stocks are mixed while US futures are lower on Wednesday, as investors struggle to justify recent gains amid the ominous global economic outlook.
Still, equity markets have calmed down noticeably, with the VIX having declined by 35% since its March 16 peak, although it is still more than three times the average over the past five years. That said, investors must remain vigilant against another spike in volatility, as equity markets may be triggered into another sell-off on any signs that the Covid-19 crisis is worsening.
Considering the relatively elevated levels of safe-haven assets, it’s abundantly clear that investors remain cautious over the virus fallout. The Dollar index is not straying far from the psychologically-important 99 level, Gold is trading around the upper-$1500 range, while USDJPY is keeping to sub-108 levels for the time being. Risk sentiment appears to be in a holding pattern, awaiting the next major development in the coronavirus outbreak.
Markets cannot afford to ignore warning signs
President Trump’s warning to America to brace for a “very, very painful” two weeks, coupled with his administration’s estimate that as many as 240,000 Americans may lose their lives to Covid-19, is a stark reminder that the coronavirus-induced crisis is still raging in major economies.
Although China’s PMI figures released this week mark a return to expansion, investors are still treating such data with caution as the gains in Chinese stocks are not echoed across the rest of Asia. As the saying goes, ‘one month does not make a trend’.
With a global recession now being the overarching theme for the year, investors are expected to endure a bumpy ride before they can place firm hopes on the eventual recovery.
Stocks yet to find equilibrium amid expected earnings downgrades
The quest in finding that floor for stocks appears to still have some way to go, given that valuations remain relatively elevated compared to how corporate earnings typically fare amid a recession. Although the S&P 500’s P/E ratio has now moderated to its 50-year average of 17, it’s still higher than the reading of 10 that was registered after the Great Financial Crisis in 2009.
What remains of the stubborn optimism in equities will likely be tested when the next US earnings season gets under way in two weeks. A one-two punch of negative surprises in earnings and a still-rising death toll Stateside should eviscerate misplaced hopes that the recent monetary and fiscal support measures can immediately repair the economic damage left in the wake of the coronavirus.
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