Risk-On ‘Nirvana’ Envelops Global Markets as Stocks Hit Records
“It’s like a risk-positive nirvana has descended over the capital markets and traders have very little to trouble themselves with other than going with the flow,” Chris Weston, head of research at Pepperstone Group Ltd., wrote in a note to clients Wednesday.
Global stocks have climbed to fresh records, cash is pouring into equities most exposed to a strengthening economy and expectations for a volatile end to the year are vanishing even as the pandemic continues to rage. The MSCI AC World Index is on track for its best performing month ever.
Here’s a selection of charts that capture the bullish sentiment:
The MSCI World Index is trading at a record, but perhaps more important for equity bulls is the fact its equal-weighted counterpart -- a better gauge of what the “average” developed market stock is doing -- is also at an all-time high. That suggests the recent rally is not just down to a few megacap benchmark heavyweights and market participation is broad.
Markets, especially in the U.S., continue to feel the afterglow of unprecedented fiscal and monetary support amid the pandemic. A Goldman Sachs Group Inc. gauge using variables such as interest rates, foreign exchange, credit and equity markets is close to its lowest level. That signifies some of the easiest financial conditions on record.
The selection of Janet Yellen for the Treasury “effectively greenlights ‘lower forever’ policy support, big fiscal advocacy and quasi-debt monetization, as the Fed and Treasury evolve closer to one like-minded entity,” said Nomura Holdings Inc. strategist Charlie McElligott. Loose financial conditions are “an unspoken ‘de facto mandate’ of the Fed and global central banks.”
Small Stands Tall
Positive results from at least three coronavirus vaccine candidates unleashed a torrent of bets on the reopening of the global economy. That can be seen in the outperformance of smaller companies, which have surged against their larger counterparts this month and are close to wiping out their post-pandemic underperformance, according to gauges from MSCI Inc. The path of small-cap shares is often seen as an indicator of strength in the global economy.
Expectations for a volatile year-end thanks to a contested U.S. election have all but faded amid the formal start of President-elect Joe Biden’s transition period. The spread between December and January Cboe Volatility Index futures, which spiked in early November, has slumped back into negative territory.
Still, not every asset class is showing the same degree of enthusiasm. Treasuries have remained relatively resilient to the bullish news on the vaccine front and a gauge of the U.S. yield curve -- which would be expected to steepen on bullish economic growth expectations -- remains well off its year-to-date high.
©2020 Bloomberg L.P.