SINGAPORE (June 29): Market exuberance brought about by the lifting of Covid-19 lockdown measures, unprecedented monetary expansion and an upward correction from excessive pessimism over Covid-19 is likely to be brought back down to earth. The resurgence of Covid-19 in the US has seen greater introspection about when the pandemic will end and the possible economic impact, seeing a downward correction in financial markets. 

“The “all-in” approach by central banks and governments around the world –particularly by the Federal Reserve and the European Central Bank – turbo-charged [the] rebound, creating a bubble-like mania that saw the indiscriminate and quite frenzied buying of even bankrupt or near-bankrupt companies,” says CGS-CIMB analyst Lim Say Boon. Not any more -- despite a continuing upward trend on the pace-setting S&P 500, fundamentals remain precarious. 

Fed buying of debt forces credit yields down, by extension forcing down the yields expected from stocks, and hence forces up stock prices. With monetary expansion relative to GDP being a major explanation of stock valuation rises since the Global Financial Crisis, Lim notes that it was perhaps not irrational given the history of the impact of monetary expansion on stock prices for investors to go on a buying spree. Still, the recent market rally is built on sinking sand. 

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