Risk sentiment appears tentatively to be taking hold, but this could swiftly change as investors are still grappling with the complex dynamics of the Middle East crisis and its potential repercussions on the global economy.
The recent risk-off sentiment that had cast a shadow over the markets seems to be easing, partly due to extensive shuttle diplomacy by The Whitehouse and other regional actors. Nevertheless, this optimism comes before Israel launches its ground offensive in Gaza, and this development could swiftly sour sentiment once more.
Efforts to prevent a wider regional conflict in the Middle East have contributed to a rally in financial markets and easing in “go to” hedges like oil and gold. Wall Street saw gains, with all three major indexes rising by around 1%. This positive sentiment spilled over into Asian markets on Tuesday.
From a bird’s eye perspective, the current tentative risk rally and decreased demand for safe-haven assets seem more of a function of no escalation rather than a broader de-escalation. Leaving investors still on tenterhooks
While markets continue to operate in the shadow of elevated rates and heightened geopolitical tensions, traders might be encouraged by recent indications that the Federal Reserve may not raise interest rates again this year.
However, as Treasuries provide an attractive alternative return on an expected Fed pause, money flow out of pension funds and households into bonds is expected to continue. Additionally, mutual funds are anticipated to become net sellers of equities as customers shift their investments to lower-cost passive investment funds.
So who will buy them? Corporations, of course. Look for buybacks to retain their status as the largest source of equity demand in 2024. In other words, stocks will be the biggest buyers of stocks.
