Need to Know: What could upend the stock market rally? Watch these red flags, says Credit Suisse

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Another record-setter for stocks is looking like a tall order for Tuesday, with futures leaning lower after stimulus hopes and surging oil prices sent equities climbing to start the week.

While momentum has slowed a little, this largely unstoppable market generally lets little stand in the way of new highs. So, a pause that refreshes?

As for what could derail the stock market, our call of the day from global equity strategist Andrew Garthwaite and a team at Credit Suisse, offers up a shortlist of red and yellow flags.

“We have remained overweight equities on the back of highly supportive policy, a high ERP [equity risk premium], the start of a bond-for-equity switch and huge excess liquidity, while tactical indicators are not yet sending a sell signal,” say the strategists.

For instance, they aren’t too worried about market “exuberance,” right now, as they say retail flows are muted and there is little systemic risk or sell signals from other indicators.

As for their worries:

  1. Disappointing growth in Europe — medium risk and rising. A slow COVID-19 vaccine rollout and furlough plans and fiscal policy that look less generous than the first time around are a worry. Unlike in the U.S., banks in Europe are doing the corporate lending currently and bankruptcies are being suppressed through moratoria. “We see this as being a European, not global, equity problem, with European GDP [gross domestic product] being c.16% of global GDP — though a tactically stronger USD could be a consequence,” says the team.
  2. Less dovish Federal Reserve — high risk in second half 2021. That is amid the potential for stronger U.S. growth amid easier fiscal policy, pent-up pandemic demand and economic reopenings. “If this happens at a time when inflation rises to 2.5%, wage growth is higher than expected and there are concerns about asset bubbles, the Fed could become less dovish,” say Garthwaite and the team. Also watch for 10-year Treasury yields TMUBMUSD10Y, 1.155% above 1.7% or sharply rising TIPS (Treasury inflation-protected securities) yields, they say.
  3. China slowdown — low to medium risk. Recent policy tightening is nothing to get too worked up about, but China’s current account could deteriorate more as the global economy reopens. Keep an eye on housing market indicators, some of which are pointing to a sharp slowdown. If that happens, “excess leverage would begin to unravel, says Credit Suisse.

Elsewhere: “We see the possibility that vaccines do not work against mutations as low risk, especially as modifications can be rolled out in 3-6 months. Other low-risk events include fiscal stalemate in the U.S. Senate and policy mistakes (with the exceptions of U.K. fiscal policy and French furlough unwind, which we see as higher risk),” says the team.

Read: The stock market is echoing 2009-10 — and that means a pullback could be near, analysts warn

The markets

Stock futures ES00, +0.08% YM00, +0.17% NQ00, +0.12% are modestly lower, with European equities SXXP, -0.09% in the red. Asian markets climbed after Wall Street’s record session. Brent oil BRNJ21, +0.89% is busting out fresh highs above $61 a barrel.

Bitcoin BTCUSD, +4.16% just kept climbing, tapping $48,000 at one point, after electric-car maker Tesla TSLA, -1.71% revealed a $1.5 billion investment in the cryptocurrency and signaled it will accept bitcoin as future payments.

The tweet

Meanwhile, Tesla apparently hasn’t been so generous with employee retirement plans.

The buzz

Canadian cannabis company Canopy CGC, +13.61% reported a wider-than-expected loss but revenue topped estimates and shares are rising. Materials and chemicals giant DuPont DD, -1.68% reported forecast-beating profit and sales. Social media messaging service Twitter TWTR, +3.93% (see preview) and technology conglomerate Cisco CSCO, -0.48% will report after the close.

Democrats on Monday unveiled their plan to get more stimulus money to families, boosting the $1,000 current child tax credit for a year up to $3,000 and slightly higher for families with smaller children.

The parents of a Robinhood trader who died by suicide when faced with a massive negative balance sued the online broker for wrongful death.

A small-business confidence index shows optimism hit the lowest since the pandemic onset began last spring. Job openings are also ahead.

The World Health Organization says COVID-19 probably jumped from an animal to a human, and not from a Chinese laboratory.

Former President Donald Trump’s impeachment trial begins on Tuesday.

Random reads

Free ice cream and Russian COVID-19 vaccine jabs? Another “The Simpsons” prediction comes true.

A Redditor asks how everyone is doing with pandemic depression, burnout and fatigue; he gets more than 3,000 mostly miserable responses.

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