Traders on the floor of the New York Stock Exchange. The S&P 500, an index broadly considered to represent global markets, last week ended down 16 per cent from an all-time peak hit in mid-February. Image Credit: AP

Dubai: With investors undeterred by a spate of disappointing economic data and virus-related news, investors are seen cautiously raking in gains as markets apparently headed for a post-crash recovery.

Markets have rebounded since an initial dive during the coronavirus pandemic, recovering more than half their losses. However, this has raised questions about their seemingly oblivious reaction to an onslaught of dire economic projections.

Last week, global stocks ended lower for the first time in three weeks, but the marginal move was muted when weighed against a multitude of negative catalysts which emerged throughout the week.

The S&P 500, an index broadly considered to represent global markets, last week ended down 16 per cent from an all-time peak hit in mid-February. The benchmark is also nearly 30 per cent higher than the lowest point it reached in March when stock markets crashed worldwide.

What is next week’s focus?

Next week’s focus will turn to central banks again, with the US Federal Reserve, European Central Bank and the Bank of Japan all announcing their latest decisions on rates.

“Given that these central banks have been rather proactive outside of their regular meetings, we do not expect major changes to their policy this week,” noted Aditya Pugalia, director of financial markets research at Emirates NBD.

“Yet, it will be important to hear their prognosis of the health of the global economy,” Pugalia further added.

Eyes on more data, Q1 results

The composite, manufacturing and nonmanufacturing PMIs from China are also due on Thursday, which is expected to give an indication of how their economy has recovered as lockdown measures have been eased, and what that could mean for the rest of the world as social restrictions measures are eased.

Also, eyes will be on key corporate guidance as first-quarter earnings ramp up this week, with several big names expected to reveal more COVID-bogged results.

And with businesses slashing or suspending dividends to cope with the economic fallout from the coronavirus outbreak, it only further complicates the stock selection process for investors eager to prop up their portfolios with a steady stream of income.

Bracing for more oil uncertainty

After a topsy-turvy start to last week, prices ended lower with Brent futures falling almost 24 per cent to settle at $21.4-a-barrel while WTI closed its roller coaster week at $16.9/barrel, down 7.3 per cent. Both contracts are now down around 70 per cent since the start of the year.

“I would caution on being overly bearish as risk management protocols suggest more rolls out of June into July could happen next week, meaning less settlement risk in June contract,” wrote Stephen Innes, chief global markets strategist at AxiCorp.

Investors will brace for more such volatility in the coming days as negative oil prices are now seen becoming a norm. This is widely attributed to the imminent settlement of June contracts and the market looking to test global storage capacity in the next three to four weeks.

“This will likely create substantial volatility and possibly more spikes to the downside until supply finally equals demand, as with nowhere to store the oil, supply has no other option but to be shut-ins,” Innes added.

Is the current rally superficial?

Historically, stock markets have had some of its best returns when conditions are shifting from awful to less bad. The recent rally in energy stocks in the face of record-low washout prices in crude oil is an illustration of that.

Yet the world still continues to grapple with the coronavirus pandemic, global gross domestic product is expected to shrink by 3.9 percent and unemployment has risen to levels not seen since the Great Depression.

With markets having recovered more than 20 percent since their trough, global benchmarks have thus far become the shortest bear market in a century.

Rallying on fear of missing out

Analysts continue to debate the disconnection seen between markets and the real economy. While some argue stock market movements are indicative of a future rebound, others find the recent rally ‘somewhat ridiculous’.

At least for now, however, markets are expected to remain cautiously optimistic despite the large amount of uncertainty awaited in the next several months. One reason markets may be discounting the daily onslaught of horrific economic news is that investors don’t want to be locked out of a recovery.

Some say the likely extent of the slowdown will be severe relative to historical experience for reasons that include, a pandemic whose duration is unknowable and an oil shock whose impacts on earnings will be deflationary.

When the S&P traded at similar levels in both January 2018 and March 2019, forecast earnings over the next year were appreciably higher – meaning stocks now look more expensive – and credit spreads are much wider now, which suggests a riskier environment.

Stocks overbought and overvalued?

Flows into the ETFs that track major benchmarks, technology, healthcare and utilities have reached extremes, a sign they are getting a bit overheated and are prone to backing off.

The S&P, in fact, has stalled over the past two weeks, chopping sideways just below the rebound-rally highs, as some growth stocks take a breather and short-term overbought conditions are worked off.

It would not be surprising for the indexes to continue digesting the move, assimilating the rush of corporate earnings in coming weeks, with some observers looking for a potential pullback of a few percent from here simply as a matter of technical market positioning.

Just because the market is leaning on sturdy growth businesses rather than outright positioning for a better economy doesn’t mean this theme can carry the market indefinitely higher from here.