Dubai: Investors are preparing for more stock swings in the weeks ahead as economies try to reopen without fueling a resurgence in coronavirus cases and global trade tensions rise.
“Global equities reversed momentum last week as heightened tensions between the US and China and early fears of a second wave of coronavirus infections took hold,” noted Aditya Pugalia, director of financial markets research at Emirates NBD.
Although the market recently recorded its biggest rebound in decades, in other ways benchmarks have gone nowhere. A lack of an all-clear on the pandemic front, coupled with worrisome technical and sentiment indicators, led many strategists to believe the market was getting ahead of itself.
Rally relied on few stock moves
“There has been a lot of market chatter about the relative strength of equity markets despite weak economic data and dire near-term outlook; However, there is growing evidence that the strength is coming from a select few stocks,” Pugalia added.
Despite the steep rebound last month – rising amid hopes for a coronavirus treatment and a partial reopening of the economy – the S&P, an index broadly considered to represent global markets, has been trading sideways in the past few weeks near levels first reached in early 2018.
Analysts have been debating whether the recent losses in stocks resulted from profit taking after April’s swift rally or were it the start of a prolonged decline that may become more apparent in weeks to come.
Volatility returns to markets
The CBOE Volatility Index, known as Wall Street’s fear gauge, posted its biggest weekly gain in about two months, reflecting the S&P 500 index’s 2.6 per cent slide from its April 29 high. VIX futures have jumped as well, with investors pricing elevated risk in the coming June.
Although the VIX futures curve has fluctuated in shape over the past week, it is currently pricing in volatility higher than they were a week ago, which shows investors betting market turbulence will be elevated in coming weeks.
Investors on a defensive footing
Several investors are positioning for further turbulence by shunning value sectors such as energy and financials in favor of technology and healthcare, two areas that have held up relatively well during recent market turmoil.
Investors pulled another $6 billion from equity funds in the latest week, according to fund tracker EPFR, taking the year-to-date net outflow to $40 billion. Meantime, an enormous $1.2 trillion has been moved out of risk assets and into money-market funds. This clearly shows longer-term public investors in a defensive posture.
What drives the unrest?
For now, a pile-up of worrying domestic and international news have prompted investors to pull back on equities.
“Comments from the Fed Chairman Jerome Powell wherein he reiterated a somber assessment of the economic outlook also forced investors to move away from pricing in a quick V-shaped recovery,” Pugalia added.
US President Donald Trump has ratcheted up rhetoric on China, floating the possibility of cutting ties with the world’s second-largest economy.
Also, the White House on Friday moved to block shipments of semiconductors to Huawei Technologies Co Ltd from global chipmakers, which analysts say could put pressure on a global economy already suffering its deepest contraction in decades.