Are Equities going into full-optimist mode?
So far this week we have had a rally in equities, with a few key benchmark indices crossing above key technical levels. Is the move overextended and are we getting ahead of ourselves? The reason for these moves as explained by the main financial media outlets is that we have seen some improvement in terms of number of cases and deaths due to Covid 19 in Europe. Over in the States, there are talks that the worst week is occurring as we speak and things should start to get better from next week. So it seems that there are some positives that fuel investor enthusiasm. Something else that could be helping this rally is the unprecedented levels of government and central bank support. Is QE going to be the answer to all of our problems again? It remains to be seen.
The big question at the moment is - are traders and investors forgetting the economic impact of the shutdowns that are currently imposed? Are governments going to bail out everyone that is in trouble? At the moment markets seem to be pricing in a speedy recovery similar to the one we had in China. The stock market benchmarks there had a V shaped recovery. The data in the coming months is going to show just how hard the global economy has been hit.
Gold, DAX and SP500 cash daily charts
Something to notice is that as the risk assets (DAX and SP500) broke above resistance levels and are respectively trading above 10,000 and above 2700 now, we also had a big move up in Gold which is trading not far away from 1700.
Gold,Silver and 10 Year T-Notes daily futures charts
Moreover in Gold futures markets we had a clean break above 1700, where June futures traded as high as 1742.4. At the same time Silver futures also broke higher and stopped their rally just below 1600. However 10 Year T-notes futures are far away from their highs and moved lower over the last two days.
In summary we have indices trading more than 20% higher from their lows. At the same time we have some safe haven assets moving towards their highs, and their futures actually breaking above key technical levels. How warranted is the enthusiasm in equity markets? Or are risk off assets overpriced? The economic data to come is going to show and we will also see whether this slowdown in corona virus spread and deaths is something temporary or we are actually flattening the curve.
Let us know your thoughts - is the rally in risk assets going to continue, or are investors entering full-optimist mode?