Stocks cool off from record highs

2 mins read

By Han Tan, Market Analyst at FXTM

The rally in global stocks is taking a breather before the weekend, having posted a new record high on Thursday. Most Asian benchmark indices are in the red, while US equity futures are dipping slightly.

Friday’s pause appears warranted by technical indicators, seeing as the 14-day relative strength index for several major benchmark indices from Hong Kong’s Hang Seng index to the Nasdaq Composite index have moved into overbought territory.

Perhaps investors are taking a moment to consolidate their thoughts, as there’ll be plenty to take in over the coming days that may dictate whether global stocks can end the month with a flourish.

The week ahead features a full slate with Big Tech earnings, top tier economic data out of the US and China, and of course, the next FOMC rate decision. Any of these key events may give riskier assets added reason to climb another leg higher, or at least have a major say on the risk narrative in markets.


Expect more record highs for stock indices

The broader argument for more upside in risk assets remains intact. More US fiscal stimulus is expected, the Fed is set to remain ultra-accommodative policy-wise and the global economic recovery is being put on a firmer trajectory thanks to the vaccines’ rollout. Such conditions are creating a conducive environment for riskier assets to look for more upside.

Such a rose-tinted outlook has even afforded investors the luxury of ignoring the gloomy commentary out of global leaders. US President Joe Biden has warned that the death toll could exceed 500,000 in February and UK Prime Minister Boris Johnson didn’t dismiss the possibility of the lockdown extending into the summer.

Meanwhile, on Thursday ECB President Christine Lagarde signaled the risk of a double-dip recession for the Eurozone economy.

Still, in the event that any of the downside risks to the world economy materialises, that may trigger the undoing of recent gains in multiple asset classes.


Oil bulls demand more proof

Brent and WTI futures are trimming their respective gains for the week, as investors curb their demand-recovery optimism given Covid-19’s resurgence and extended lockdowns in major economies.

On oil traders’ radars are the EIA crude oil inventories prints, as well as the Markit PMI readings out of the US, UK and the EU which are all due later on Friday.

Oil bulls need to be fed signs that global demand is taking surer strides towards pre-pandemic levels before prices can register further gains and take full advantage of the supply-side interventions.

Although the recovery in Oil markets since April has been nothing short of remarkable, the easiest of the advances appear over already.

The lingering downside risks to the world economic outlook, coupled with conflicting goals among major oil-producing nations, inhibit the commodity from exploring more of its upside. The $60/bbl handle for Brent may be a step too far for the time being, barring a material change to the supply-demand equation.


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