Market update: Sentiment cagey towards risk

Sentiment towards risk assets have turned somewhat bearish in recent days. As well as selling of US technology shares, oil prices, the pound and crytpos have also come under pressure. This morning saw European indices gave back some of the gains made yesterday in the absence of US markets. US index futures have declined ahead of the open following the long break, with tech stocks seen tumbling at the open. The risk-off tone has helped to push the dollar higher across the board, which has even weighed on gold.  

The cagey sentiment is a reflection of rising new Covid-19 infection rates across Europe, renewed concerns over Brexit, valuation concerns and waning impact of past stimulus measures. Then there are many other concerns that include, for example, US-China tensions which notched up a gear after Donald Trump said he is going to "end" US reliance on China, as well as political uncertainty ahead of the US presidential election.

France suffered a new peak in new virus cases while infections also rose sharply in Germany and the UK. The pound fell sharply after PM Boris Johnson said he will challenge the Brexit Withdrawal Agreement, a suggestion which angered Brussels.

Investors are therefore having second thoughts about being aggressively long risk assets. Yet, sentiment is not full-on bearish yet.

They know full well that central banks and governments are not done yet and there will likely be more stimulus to provide a backstop in case things i.e. the economy and/or stock markets start to go south again.  So, it will be interesting to see how things will pan out over the coming days, and whether the dollar will extend its recent rebound or resume.

There are no obvious fundamental triggers to cause a sharp move in FX though until European Central Bank meeting on Thursday, which should cause the EUR/USD exchange rate, and in turn, the Dollar Index to move sharply. Christine Lagarde and her colleagues will most likely hold policy unchanged. But given that downside risks have intensified over the past several weeks, the ECB may provide a dovish assessment of the Eurozone economy and in doing so raise the prospects of further easing measures later on in the year. This should be welcomed by European stocks.

In so far as Wall Street is concerned, investors will come back after a long weekend and judging by futures, the markets will likely open with a gap down. In particular, it will be technology shares which will garner most of the attention today, with Tesla down about 11% in pre-market and Apple 5% worse off.