Asia Stocks: Positive market vibe suggests investors are de-emphasizing downside risks


US equities were stronger on Wednesday, the S&P500 closing 1.7% higher following similar gains in Europe. Energy stocks led the US equity gains as oil rose 4%. 

An easing in mobility restrictions, hence recovery hopes, might have helped as well, with the Wall Street Journal reporting all 50 US states have now reduced at least some lockdown restrictions. US10Y treasury yields fell 1bp to 0.68% as the Treasury's issue of a 20-year bond, the first since 1986, was met with huge demand. And why not? If risk premium rises in the backend, the Feds will step in and adjust the YCC lower.

But what’s key for the stock index investors is the tape is gradually exhibiting emerging signs of cyclical leadership. Sure, the tape remains defensive, but from a thematic perspective, China-exposed names continue to outperform with demand seen in miners, luxury and selective chemical names. There’s enduring investor demand for US equity index futures as sectors within the S&P 500 are exhibiting emerging signs of cyclical leadership; this is hugely bullish for stocks and risk assets in general. 

And while CTA accounts did not drive the recent bout of volatility as stocks fell (it was retail that bailed), if there’s a break higher, secure CTA buying should kick in. Risk control accounts are slowly increasing exposure as realized volatility declines. I know this stuff does not make for great press or hot takes, but there are several CTA buy levels in the SP500 that triggered on the vaccine headlines. And there are two of the three buy signals currently in the stack for Long-Term strategies, which are believed to have the most AUM following, so expect intense buying pressure when the signal crosses. They typically happen around 200 DMA, so I think it’s safe to say SP500 2995-3000 will hold a chunky buy order. 

FOMC minutes suggest the Fed is game planning for more persistent pandemic effects. The minutes show growing concerns about persistent adverse effects from the virus, but this aligns with the market consensus of diminished recovery expectations for the US economy over the coming quarters. But given that everyone is starting from a low point, positive surprises will be consumed in earnest

Japan has reached its worst point since the start of Abenomics in 2013. Whether Abe is re-elected as PM is critical for the monetary policy outlook. If Abe resigns, most likely BoJ Governor Haruhiko Kuroda will step down as well, precipitating a significant shift in the monetary policy.  

Australia-China trade tension continues to lurk and on the surface are worrisome given Australian trade linkages with China. But provided the disputes remain at the agricultural level, as opposed to escalating to iron ore, the local market is not getting to wound up about this nascent political imbroglio at this stage.  

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