US stock indices hit new record highs after the latest attempts to break the political stalemate in Washington, as investors hope that a fresh US fiscal stimulus package could be rolled out by year-end. Risk assets are rejoicing at the thought of thawing political resistance, even though the actual package is not yet a done deal.
On Tuesday, Senate Majority Leader Mitch McConnell hinted at his willingness to compromise with Democrats, which prompted US equities to erase losses from the open and end the session in the green. After markets closed, outgoing US Treasury Secretary Steven Mnuchin then offered a US$916 billion proposal to Democrats as an olive branch, which is the first move by the Trump administration since the November elections to break the deadlock. The latest offer has yet to receive the Democrats’ blessing.
Energy boost: S&P 500 hits all-time high
The S&P 500 closed above the 3,700 line for the first time in history, with energy stocks leading the rally once more, and its futures contracts are now holding steady above the psychologically-important level.
However, the blue-chip index is flirting with overbought levels, judging by its 14-day relative strength index. This suggests that a near-term pullback is in order, which may be necessary so that US equities can begin 2021 on the right foot and take full advantage of all the tailwinds that are in play.
Despite having already enjoyed stellar gains in November, the party in US equities is still alive and kicking, as market participants show little qualm pushing benchmark indices further into uncharted waters. Perhaps we are seeing the early makings of a “Santa rally”, with tech counters refusing to be left behind by the reflation rally.
Tech and December: a jolly combo
Futures on the Nasdaq 100 index are also holding around its highest levels ever, after the index posted 10 consecutive days of gains. It is now one short of the 11-day winning streak from December 2019.
Yet, as is the case with the S&P 500, the Nasdaq 100 appears due for a pullback towards healthier levels, which could still occur between now and Christmas.
Pfizer vaccine: a big reason for the risk-on season
While investors welcome the thought of more incoming fiscal stimulus, with sentiment further supported by ultra-accommodative central banks around the world, the good news surrounding Covid-19 vaccines are also taking much of the credit for the stock gains of late. Investors have been keen to reward these vaccine-producing companies as well, with Pfizer’s shares being sent to a new two-year high.
With Pfizer’s vaccine widely expected to receive US emergency-use authorization tomorrow (Thursday, 10 December), that could spur further gains in the stock, given that trading momentum is still pointing northwards. However, bears may yet capitalize on this “sell-the-news” opportunity, which would in turn bring the stock away from ‘overbought’ levels.
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