Risk assets surged powerfully in April, weathering multiple challenges including stalled peace talks, signs of resurgent inflation, and uncertainty surrounding the Federal Reserve's leadership. Now, investors may face a new test: the rapid pace of the rally itself could become a risk hindering further gains. Global stock markets began the week at or near record highs. The S&P 500 has climbed nearly 10% since the end of March, on track for its best monthly performance since late 2020. Last Friday, the US Department of Justice concluded its investigation into Fed Chair Powell, clearing the path for the confirmation of Kevin Warsh's nomination. This fueled market bets that the Fed could restart interest rate cuts within the year, pushing US Treasury yields lower. Strong corporate earnings and resilient economic data have driven the S&P 500 approximately 3% above its pre-Iran conflict peak. Hopes for progress in US-Iran peace talks over the weekend provided a boost to markets last Friday. However, conflict risks persist: the relevant talks have been cancelled, oil prices remain elevated, and still-high US Treasury yields are increasing borrowing costs across the market as traders brace for further inflation shocks. Francis Tan, Asia Chief Strategist at Indosuez Wealth Management in Singapore, stated bluntly: "The market is currently going 120 kilometers per hour. When it really needs to change lanes, there might be very little room to react. Personally, I remain cautious." There are already signs that investor enthusiasm for the biggest beneficiaries of the month-long rally may be waning: The largest US crude oil ETF (USO.US) is expected to record its largest monthly outflow since 2009; meanwhile, one of the largest semiconductor funds, the iShares Semiconductor ETF (SOXX.US), suffered its largest weekly outflow on record just one week after experiencing record inflows. Both funds are among the most crowded trades in the current market. John Tully, Global Head of Macro Sales at Bank of America Securities, wrote in a report to clients on Sunday: "We are seeing increasing protective buying at these high levels." He added that, based on views from the bank's trading desk, investors should hedge in interest-rate-sensitive market areas such as small-cap stocks, regional banks, and gold. He noted that investors who view gold as a high-volatility risk asset could still be washed out of the market due to underperformance. This week, investors will get a key signal regarding US corporate earnings. Google (GOOGL.US), Microsoft (MSFT.US), Amazon (AMZN.US), and Meta Platforms (META.US) are scheduled to report earnings on Wednesday local time, with Apple (AAPL.US) following the next day. These five companies collectively account for a quarter of the S&P 500's total market capitalization. Michael Romano, Head of Hedge Fund Equity Derivatives Sales at UBS Securities, wrote in a Sunday client report: "The violent rebound in risk assets since the March lows has left investors cautious about the earnings of large tech stocks, questioning whether the positive news is already fully priced in. This week's earnings from big tech could trigger catch-up trades among the hyperscale cloud companies, but the expectation bar is high, and positioning is already quite crowded." Attempts to restart peace talks to end the Iran conflict faltered over the weekend after the US President cancelled a planned trip by his senior envoy, while Iran stated it would not participate in talks as long as threats persist. The President informed Jared Kushner and Steve Witkoff to cancel their trip to Pakistan (the mediating party) on Saturday, later telling reporters that Iran's "conditions were many, but not good enough." Iran's President, Masoud Pezeshkian, stated that Iran would not accept "imposed negotiations under threat or blockade." Although a ceasefire has largely held since early April, both nations maintain a blockade in the Strait of Hormuz, rendering the critical energy passageway nearly impassable. Market hopes for advancing peace talks pushed oil prices lower on Friday, with WTI crude futures falling 1.5% to settle above $94 per barrel. However, this decline only partially retraced the week's 13% gain, which was the largest weekly increase since the conflict erupted in early March and sent oil prices soaring.
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