Asian stocks are off to a muted start after a dip in US shares amid concern the recent rally had gone too far. Even after the European Central Bank (ECB) fired off a policy bazooka, stocks struggled for traction as S&P 500 suffered its first loss in five days though the Dow ended mostly flat.

Has pre-Non-Farm Payroll sticker shock set in?

A gnarly US NFP is likely to herald the highest unemployment rate since the Great Depression. So, given the magnitude of scintillating equity market moves of late, arguably overextended bullish positioning has likely forced a few hands.

Sharply rising unemployment and rallying equity markets perhaps best underscore the disconnect between stocks and the real economy. It will be hard for the US employment report for May (cons: NFP -7.5 million; unemployment rate 19.1%) to shock markets, given the nonplussed reaction to recent labour market data. Still, the sticker shock of near-20% unemployment suggests US equities may need a rapid recovery in the critical job metrics to justify these elevated levels, let alone for stock markets to punch higher.

Investor fatigue

While it’s entirely possible investor fatigue is setting in, it is also clear people are starting to look outside of US equities for yield. For me, that is one of the things to watch, which could signal the end of the rally is near.

Although equity trading pads are busy, US cash-equity flows have been relatively balanced across purchases and sales for the past week. The catch-up to US market gains in Europe and Emerging Markets equity markets is suggesting that those few bullish stock market participants are reaching out for risk and return in other markets beyond US stocks.

ECB: Big Bold and Beautiful

Still, “Big Bold and Beautiful” for the Euro is how the market sees the ECB policy. The ECB on Thursday delivered a bigger-than-expected stimulus package – an increase of PEPP by €600 billion to €1,350 bn, and an extension of the program until mid-2021 the ECB has moved well ahead of the curve absent a severe escalation of the corona crisis

Calling a top is a mug’s game

However, I still think calling the top is a mug’s game with the Fed and the ECB papering the ticker tape green. Liquidity supports risk assets as stimulus impetus becomes too hard to fight, although scepticism remains high on the critic’s list for a rapid return to economic normalcy. The words ‘capitulation’ and ‘melt-up’ are appearing more frequently in the narrative, suggesting moves are starting to cause pain.

The next risk-off catalyst?

Every night this week, I have been on a call with a former bank trading colleague from Tokyo discussing the next catalyst for a return of risk-off would be. Aside from the second wave of coronavirus, it is hard to come up with one. But it’s easier to write a list of things the market does not care about right now.

The only thing that came to mind was the US Presidential election: regardless of who wins, it will end up being bad for risk markets. Trump’s popularity matters less for US equities as investors likely view his presidency as extremely polarising after bearing witness to 4 years of uncompromising chaos and drama.

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