Trader's View - Risk appetite lifts as FOMO kicks-in

Wall Street adds to its record-highs

The first day of the financial week has been done and won, and its resulted in another small victory for Wall Street indices. US stocks have added to their record highs overnight, as market participants become increasingly bullish across asset classes. The story wasn’t quite so rosy for markets in other geographies yesterday: Asian equities generally slid amid low activity, while European stocks were positive, yet tepid in their trading. Still, it seems, the one clear bright-light in global financial markets is in the US, with the question once more becoming: how long can this latest bull-run last?

Momentum picking-up in US equities?

There remains a general reluctance from market participants (to use an American idiom) to drink the Kool-Aid in this market. The fundamentals, though solid-enough, don’t seem to justify it entirely. Valuations aren’t stretched, but they are largely as attractive as they are due to discount factors, rather than true earnings growth. Nevertheless, perceptions are shifting, with some of that FOMO-money, long sitting on the sidelines in this rally, apparently making its way into US equities. The great momentum play stocks, are exhibiting some of the behaviour they did during last-years run-up, suggesting a growing exuberance in the market.

US tech playing catch-up

As one with a clear enough memory may recall, the centre of last year’s flow chasing rallies and busts was the US tech-sector. Perhaps remarkably, and reassuringly for the bulls in the market, although valuations across the S&P500 has crept towards levels reminiscent of October last year, valuations in tech stocks have so far lagged the broader market, this time around. It’s a state of affairs that’s rapidly changing, but using the NASDAQ as the barometer, valuations in US tech, at 35:1 price-to-earnings, is still well below the eye-watering 48:1 and 53:1 P/E ratios registered in October 2018 and December 2017.

Treasuries fall, despite no-change to the rate outlook

Another area in which the eagerness to chase risk is manifesting is in the US Treasury market. Bond yields are ticking higher across the curve, without much of a fundamental macro-economic catalyst, as traders sell safe-haven assets to join the equity market rally. US 10 Year Treasury yields climbed around 3 basis points overnight, to trade around 2.52%, and the US 2 Year note’s yield edged 1 point higher. Despite still looking very bent out of shape, the slight steepening of the yield curve speaks of a market increasingly comfortable in the long-term growth outlook for the US economy.

Global inflation risk generally low

Part of this dynamic can be explained by the actions of the Fed, coupled with the low inflation environment the global economy is apparently mired within. This perception could change quickly, depending on what comes out of Thursday’s US Fed meeting. However, there’s little justification that it ought to, and this was backed-up by yesterday’s key macro-economic release: US PCE inflation figures. That release revealed once more that price growth in the US economy has continued to recede: annualized core inflation is at a stubbornly low 1.6%, implying the Fed possesses little need to return to a rate hike bias.

Financial conditions supportive; eyes on China today

So, little concern right now exists that financial conditions globally may tighten and strangle the risk-on run. It’s probably in part why the VIX remains so supressed: liquidity isn’t seen to be much of a problem. But though accommodative monetary conditions will continue to underwrite market strength, some semblance of fundamental growth will be required to keep the market-moving forward. And today, the next little leap forward will come in the form of Chinese economic data: the market moving Chinese Manufacturing PMI data is released today, with market-bulls eager to see whether the “rebounding Chinese growth” story still holds merit.

ASX 200 to open lower

The revelations contained within the Chinese Manufacturing PMI numbers will likely be the ASX’s key determinant of activity today, in the absence of any other tier-1 data. Otherwise, Wall Street’s flattish finish, that saw the registering of a new all-time closing high at 2943 for the S&P 500, will translate into a 3-point drop at the open for the ASX 200, according to the SPI Futures contract. Aside from these two variables, market participants will be keeping an eye out for Australian Private Credit figures this morning; while action in bank shares may also be worth watching, ahead of the half-yearly reports from the ANZ, NAB and Westpac.