Inflation fears and higher interest rates have continued to be front of mind for investors as is being reflected in the weakness across global equities, specifically the high growth component, namely the Nasdaq, where high valuations have started to matter.
With the US 10-year Bond Yield, trading as high as 1.6% level, up from 0.95% at the beginning of the year and 0.65% in October, the index was lower by over 12% from its peak to the low last week Friday, before seeing a minor rebound.
At the same time, the All-Country World Equity Index (ACWI) was lower by 6% after peaking mid-way through February as the cost of money rose substantially and valuations need to adjust for this new data point.
Over the last week, the Dow Jones is higher by 1.31%, the S&P 500 is lower by 1.26%, the Nasdaq Composite sharply lower by 5.61% while the Small Cap Russell 2000 Index has declined by 1.28%.
Over in Europe, the EuroStoxx 50 is higher by 19.2% week-on-week, while the FTSE 100 is higher by 2.11% over the same period.
Sectoral Rotation: Values’ Time to Shine?
It isn’t all however doom and gloom for markets over the short term. With interest rates having risen, investors continued turn their attention to stocks that have lagged over the last number of years. Here we refer to sectors such as Financials, where higher net interest margins are expected to increase as well as Energy shares that have been boosted by higher oil prices.
Over the long term, and on a comparative basis, value sectors have underperformed growth. In fact, we have seen 13 years of under-performance.
Interest Rates – Taking the Winds Out of the Nasdaq’s Sails
One of the benefits of trading via Unum Capital is not only being able to trade to a wide array of offshore instruments but also gaining access to our unique research insights which provide investors and traders with both tactical and strategic opportunities that incorporate multiple asset classes.
For example, during the 3rd week of January, our analysis identified the Nasdaq Composite Index as being excessively overbought versus historical peaks.
While for the week of 22 February we overlayed this chart versus the US Bond market, specifically the US 10 Year-US 2 Year spread where a steepening of the yield curve led to weakness in risk assets, specifically the Nasdaq Composite.
Source: TradingView, with analysts’ own analysis.
The Unum “One Big Thing”
This week, all eyes will be on the inflation data set to be available on Wednesday.
Investors have been fearing a possible increase in inflation and such fears have put a brake on the stock market in the past few weeks.
Consensus economists anticipate that the Consumer Price Index (CPI) accelerated to see a 0.4% month-over-month increase in February. That is up from the 0.3% monthly rise in January, according to Bloomberg-compiled data.
We have already seen inflation expectations rise, which can be seen via the ProShares Inflation Expectations ETF (Code: RINF):
Earnings for the Week
The earnings calendar sees several businesses across the market cap spectrum reporting throughout the week.
Before today’s open we have had Dick’s Sporting Goods, while Sonos – which is a developer of home audio products reports after tonight’s US close.
On Wednesday after the close we also have software giant Oracle reporting while Thursday sees Chinese e-Commerce group JD.com and DocuSign, which has been a beneficiary of the remote working due to the Covid-19 pandemic.
According to data from FactSet, the S&P 500 is projected to report its largest Y/Y growth in earnings in Q1 2021 (21.8%) since Q3 2018 (26.1%) and its largest Y/Y revenue growth in Q1 2021 (6.1%) since Q4 2018 (6.9%).
Most recently, the some of the large international banks have stated their belief that a commodities ‘supercycle’ has begun, which can be defined as an extended period of booming demand for a wide array of commodities.
Whilst they may be correct in their assumptions, year-to-date we have seen a steady uptick in the US Dollar which has thrown a spanner in the works of most 2021 forecasts.
The expectation amongst most major houses we for the Dollar to continue declining which would been supportive of commodities such has gold, platinum and silver and copper.
Year-to-date we have seen a divergence with Gold down by 12%, Silver down by 5%, while Copper and Platinum is higher by 13% and 9% respectively, primarily due to auto demand, including electric vehicles.
New IPOs This Week
Roblox (Code: RBLX) – The video game developer is looking to sell 198m shares at price of $45 per share Exchange: NYSE
Coupang (CPNG) – to be listed on the NYSE, the group is a a South Korean e-Commerce company looking to sell 120m shares in a range of $27-30.
Hayward Holdings – a leading supplier of pool equipment and systems, the group is looking to sell 40m shares at a price of $17-19.
We remain long of the IPO ETF
ETF of the Week
While we may see a brief pause in the US Dollar following its strong advance over the short term, the medium-term trend remains higher, driven by expectations of higher yields which would see money flowing to the US. On this basis, from a medium-term perspective, the Invesco DB US Dollar Index Bullish Fund (UUP ETF) maybe be a viable option for investors looking for a way to take advantage of US Dollar strength.