Risk rally falters

US stocks lost their footing and became ‘delirious’ yesterday.

Standard & Poor's
Source: Bloomberg

If we rewind back to the ‘pop life’ just before Thursday, it is apparent that several factors were behind recent gains. A softer USD, jump in oil prices and Q1 earnings results continuing to beat low consensus. Nearly a quarter of S&P 500 firms has reported their profits, with around 80% beating earnings estimate, and 60% exceeding revenue forecasts.

From a fundamental perspective, there was not a lot of improvement in the US economy, although the labour market remains solid. It was no wonder that quite a few market watchers expect a pullback to be a sign of the times.

But let’s not go crazy over the retreat. The S&P 500 is close to its all-time highs at 2134.72, and while it may sounds counter-intuitive, some retreat is needed for bullishness to sustain. It is not a ‘purple rain’.

Having said that, the lack of a strong improvement in the economic outlook raises questions whether the stock rally will go on. In my view, equities may find it difficult to push higher from recent levels. Nonetheless, it is probably not a good idea to be contrarian as the uptrend remains intact.

 

No action from ECB

While ECB did not announce fresh measures during yesterday’s meeting, as widely expected, President Draghi is leaving the door open for more easing if necessary. He, however, did urge everyone to have a bit more patience and give the current measures time to work. He also added that criticism at the ultra-loose policies of the ECB is not helpful and may delay the transmission of the measures to set objectives.

 

China stocks retreat

Analysts are a little stymied why Chinese equities continue to head south, although there is a number of reasons which could put things into perspective. Concerns over short-term liquidity pressure and potentially disappointing corporate earnings, as well as uncertainty over more stimulus from Beijing may have weigh on the Chinese stocks. The ‘National Team’ was suspected to be in the market to buy financial stocks and support the overall market, according to Wall Street Journal. Other large institutional buyers may also have been in the market.

 

Yesterday: S&P 500 -0.5%; DJIA -0.6%; DAX +0.1%; FTSE -0.5%

 

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