Tokyo (Bloomberg): Citigroup Inc. strategists are warning about a sense of euphoria and “substantive” complacency in financial markets, when the impact of the coronavirus is not yet clear.
“Pretty much every client we talk to wants to buy the dip, and that is not comforting,” wrote Tobias Levkovich, chief US equity strategist. “While there may be some good news on a potential slowing of the outbreak’s spread outside of the Hubei province, we are reticent to think that the impact is behind us now.”
Global equities have rebounded strongly this week, with US stocks surging to fresh records, on hopes the spread of the coronavirus can be contained. The Nasdaq Composite is up almost 4 per cent, while the MSCI AC World Index has risen nearly 3 per cent.
But watch the earnings
But for Levkovich, earnings matter most and it’s unlikely that all of the coronavirus effects are built into estimates, he said. Meanwhile, the flattening yield curve points to more volatility ahead, which is usually accompanied by “equity market wobbles”, he said.
Signals from the derivatives market, where the prices of protective put options have fallen, also indicate “substantive complacency,” he added.
“We remind clients about euphoric mindsets, and how sentiment can drive valuation,” Levkovich wrote. “With a 3,375 year-end projection for the S&P 500 and the index only about 1-2 per cebt away from that level, we just do not see a very good risk/reward set-up currently,” he wrote.