Market volatility cools as bullish momentum fades

Global equities traded around record highs on Wednesday, but upward momentum has faded in an unusually subdued period for global markets.

The FTSE All World index of developed and emerging market stocks ticked 0.1 per cent higher to its latest record. In Europe, the regional Stoxx 600 index advanced by 0.3 per cent to a new peak of 438 points.

The VIX, Wall Street’s so called fear gauge that tracks expected volatility on S&P 500 index, fell to a reading of 16.8, its lowest since last February and below its long-run average of around 20.

The sense of calm, said Luca Paolini, chief strategist at Pictet Asset Management, in fact reflected investors’ indecision over what to do next.

“I think we’ve reached that point where bullish sentiment has hit a ceiling,” he said. “The positive surprises of the pandemic,” such as the discovery of effective coronavirus vaccines and US president Joe Biden’s $1.9tn fiscal stimulus, “are now behind us”, he said.

The Federal Reserve, which has bought around $120bn of assets since last March “will have to talk about tapering at some point, the market increasingly suspects that speculation about tapering will increase in around June,” Paolini added. “But right now it is only April and the fundamentals of the equity markets remain strong,” he said, referring to the US quarterly earnings season where businesses are expected to report the strongest profit growth since 2018.

“The feeling is that things are not going to get much better from here, but no one really wants to pull the trigger and say I am getting out of equities now,” he said.

Futures markets suggested the S&P 500 would gain 0.3 per cent when New York trading begins, while contracts that forecast the direction of the top 100 stocks on the technology-focused Nasdaq Composite added 0.4 per cent.

In government bond markets the yield on the 10-year US Treasury fell by 0.02 percentage points to 1.618 per cent. This yield, which influences borrowing costs worldwide and moves inversely to the price of the debt securities, has risen from around 0.9 per cent at the start of the year as investors poised for higher inflation from Biden’s stimulus spending.

On Wednesday evening, speaking at the Economic Club of Washington, Fed chair Jay Powell said the central bank would maintain its asset purchase programme until “substantial progress” had been made towards full employment in the US.

“We will reach the time at which we will taper asset purchases when we have made substantial further progress towards our goals from last December,” Powell added in comments reported by Reuters.

The dollar, as measured against a basket of currencies, traded flat. The euro was steady against the dollar, buying $1.1977. Sterling was also flat at $1.3781.

Brent crude, the international energy benchmark, added 0.3 per cent to $66.9 a barrel, its highest level in almost a month after the Paris-based International Energy Agency lifted its demand forecast for this year.

In Asia, Hong Kong’s Hang Seng index closed 0.5 per cent lower and Japan’s Nikkei 225 was flat.