Optimists Are Pushing Shares Up And The Dollar Down

The financial markets this week start with a new wave of optimism and buying of risk assets. Many Asian indices have updated record levels this morning, while MSCI AC Asia Pacific x JP is adding 1%. At the same time, the Nikkei 225 settled at 29-year highs. Futures on the S&P 500 and NASDAQ added 0.6% and 1%, respectively.

Market cautiousness noticeably fell towards the end of last week after the publication of data on near-record inflows from individuals. The activity of retail investors has been a powerful driver of index growth in previous months and the news that this is still in place is pushing stock markets up again.
 
Observers are also drawing attention to massive liquidity injection programmes from central banks. Liquidity and meagre bond yields around the world are pushing investors from bonds to equities. However, interest in the retail sector is very unreliable.
 
Last week it was reported that consumer sentiment in the US and business sentiment in Europe were deteriorating. This is due to the growing cases of coronavirus in these regions which affects the most important sectors. If stocks stop generating profits, traders can very quickly switch from buying to selling. This investment is an attempt to invest in high-profile names or a selection of over-sold shares, based on the bounce.
 
Markets enjoyed confident retail demand after the historic collapse of shares in the spring. There are big questions about how steady the demand for stocks will be near record highs. An additional challenge for long-term investors is to increase the profitability of long-term government bonds, which makes buying them somewhat more attractive.

Thus, it will be reasonable for short-term traders to observe how the US indices will behave near the highs. The new downward turn this week will definitively confirm that the markets are dominated by upside sales, which can have broad implications for many assets.

Short-term uncertainty also surrounds EUR/USD, which earlier today rose to 1.1855. A new test at 1.1900 and confidently overcoming this level could be the start of a large weakening rally for the dollar with a potential of 1.2300. The new reversal will finally confirm the bulls' weakness, once again focusing on the potential for a decline to 1.1600.

The FxPro Analyst Team