Expanding central bank balance sheets and effective forward guidance has been crucial in supporting equity market gains. Optimism over the EU recovery fund proposal has also helped.

The consensus expectation is for a EUR500 billion expansion of the PEPP today. A failure to increase asset purchases is unlikely but would stem the rally in EURUSD in the near term and cap recent gains stocks

I don’t think you can fault investors for taking some risk off the table ahead of the enormous risk events of the week, today’s ECB meeting and Friday’s Non-farm Payrolls (NFP).

But in general, investors continue to cling to optimism for a speedy economic recovery from the pandemic and on anticipation of more stimulus from the EU.

Indeed, European equities climbed, posting their most significant 3-day rise since April 29, as investors rotated into cyclicals ahead of a crucial central bank meeting on Thursday.

S&P 500 rally piques investor interest

But it was the sizzling rally in the S&P 500 that piqued investor interest after rising for a fourth straight day and climbed back within 8% of its record set in February as lockdowns loosen around the world, raising hopes for an eventual economic recovery. The Nasdaq 100 briefly touched a record.

Stimulus tailwind

With economies emerging from lockdown, it seems markets are increasingly confident that the incredulous liquidity injections from central banks and governments alike will continue to flow into risk assets.

Earnings stream present value agnostic

Not to mention that as stimulus efforts by global central banks have driven interest rates to zero, and something very unusual is happening as investors have turned earnings present value agnostic completely. So, with risk-free rates earning nothing, the significant perma bull funds are indifferent whether they receive stock market gains now or in the future as key in the argument is shareholders have claims on earning into perpetuity.

Mapping recovery to China

But it was the better than expected China services PMI bouncing back into expansion territory during May offers a path to recovery that “risk-on” markets will hope can be replicated elsewhere.

And with US economic data continuing to roll in better than expected, particularly in the jobs sectors, so perhaps the recovery starting point is not as dreary as once thought.

More positive risk sentiment in recent days is encapsulated by the S&P 500 breaking through 3100 to the topside and the broad trade-weighted US dollar falling through second level downside support. And informs investors that markets are de-emphasizing downside risks, in favour of optimism around economies reopening.


Oil markets appear to be settling in fine as Asia gets their first read on the OPEC preliminary one-month extension. And while the weekly rig-count data will take on a more meaningful purpose as all eyes will be shale production returning.

Still, with the persistently negative adjustment figure, it continues to suggest the possibility of even more steep production cuts, it is debatable just how rampant a return of shale production will be.

The simple fact that Saudi Arabia and Russia are currently singing from the same song sheet while demonstrating a continued commitment to rebalancing the market and supporting the oil price.

The critical risk from here will be how US shale producers respond to the rebound in oil prices.

International market analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp