US equity futures are pushing higher at the time of writing, amidst the risk-on party in global equities. The MSCI ACWI index, which measures stock markets in both the emerging and developed world, also posted a new record high on Thursday, having climbed 7.16% already so far this year.

However, Asian stocks have been diverging from their global peers of late.

The Dow Jones index kicked off the trading week with a new record high, and could set another one before the weekend. Meanwhile, the S&P 500 has been met with little resistance so far in creating a larger gap above the psychologically-important 4,000 mark.

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With 10-year Treasury yields having fallen by some 15 basis points from its March 30th high, that has made for a conducive environment for stock market gains. The VIX index has reached its lowest point since February 2020, before the Covid-19 pandemic rocked global financial markets.

Fed flute plays a calming tune

The dovish Fed speak this week has played its role in soothing markets, as policymakers reiterate that they’re in no hurry to adjust their accommodative stance. Fed Chair Jerome Powell once again sought to assure market participants that the central bank has enough tools at its disposal to contain inflationary pressures, should they get out of hand. Amid green shoots of the US economic recovery, Fed officials have repeatedly said that any inflation overshoot is expected to be transitory.

Yesterday’s higher-than-expected US initial jobless claims is another reminder that the US economy will need “some time” to make its full recovery. The pace of declines in the weekly continuing claims is also slowing down, and at 3.7 million, is still double compared to pre-pandemic levels.

As long as investors believe they can rely on the Fed’s conveyed intentions surrounding their policy outlook, that should roll out a longer runway for risk asset gains. As we know, markets don’t like surprises.

Hence it is on the Fed to ensure that it can properly telegraph any policy adjustments, including the eventual tapering of its asset purchases, or risk roiling markets once more.

Earnings up ahead

Volatility could pick up next week when another US earnings season kicks off.

Markets are expecting another strong quarterly showing from Wall Street, as the US economic recovery feeds into corporate America’s top and bottom lines, which should translate into more gains for equities.

However, that isn’t to say that it’s all smooth sailing from here on out. Amid such hyped-up expectations, any major negative surprises or disappointing earnings guidance could see investors’ shoulders slump once more. The persistent hold of Covid-19 on major economies, along with uneven vaccination rates, could curtail the pace at which the world economy can return to pre-pandemic levels. Another unexpected surge in Treasury yields could also shatter the market calm at present, as the Fed’s policy outlook remains open for interpretation.

While stock market gains may seem there for the taking over the near term, investors must remain vigilant over the potential risks ahead.

 

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