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Inflationary theme play is expected to continue its outperformance

The major US stock indices have ended the first trading day for the month of June on a mix bag as the earlier session gain of +0.70% seen in the S&P 500 has been wiped out after a close test on its recent all-time level of 4,238 printed on 7 May, it ended almost unchanged (-0.05%) at 4,202. On the other hand, the Dow Jones Industrial Average and small-cap Russell 2000 gained by +0.13% and +1.14% respectively.

On a positive side, the cyclical/value stocks outperformed yesterday as indicated by the performances of the 11 S&P Sectors; Energy +3.93%, Materials +1.39%, Financials +0.66% while Information Technology lagged with a loss of -0.42%. In additional, market internals have remained robust such as more NYSE’s advancing stocks outpacing declining stocks significantly by a ratio of 2.6 and a ratio of 1.83 seen in Nasdaq for its advancing stocks over declining stocks.

Overall, yesterday’s performances of the US stock market and the major stock indices are likely not to indicate a potential trend reversal of its medium-term and major uptrend phase but rather more of a continuation of the reflationary/inflationary theme play that continues to outperform that tends to benefit cyclicals/value stocks while deflationary beneficiaries such as innovative technology and ESG related stocks take a back seat.

In addition, several economic news flow have also reinforced the reflationary/inflationary theme play, an indication that economic growth are showing green shots after a year of sluggishness from the Covid-19 crisis; OECD has upgraded its global growth forecasts for 2021 and 2022 to 5.8% and 4.4% from 5.6% and 4.0% respectively. OPEC+ oil ministerial meeting has concluded with an upbeat guidance on the global demand for oil as the gradual recovery in economic growth remains intact.

Over to the foreign exchange market, the US dollar has remained soft as the US Dollar Index continues to trade below its declining 20-day moving average which is acting as an intermediate resistance at the 90.12 level despite an improving 10-yield sovereign bond spreads between US and its counterparts such as the German bunds in the past four sessions since 25 May. Therefore, the on-going weakness seen in the US dollar seems to be driven by equities portfolio flows adjustments rather than a significant pick-up in inflationary pressures in the US that can alter the current dovish stance of the Fed.

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