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Cyclical stocks hit by profit-taking, medium-term uptrend intact

Th earlier carnage seen in the US technology and growth-related stocks such as the ARK Innovation ETF has spread to the previous cyclicals/value winners that led the pack in the past eight weeks. The more cyclical heavy weighted Dow Jones Industrial Average underperformed with a loss of -1.36% to close at 34,269 after it printed an intraday fresh all-time high of 35,091 in the prior session.

Ironically, the culprits (technology/growth) that triggered the sell-off were outperformers yesterday; the Nasdaq 100 only recorded a marginal loss of -0.06% to 13,351 and ARK Innovation staged a gain of +2.06% to close at 106.12 that erased its initial intraday loss of -4.82%. The broader S&P 500 ended with another down day of -0.87% to close at 4,152 and above its 50-day moving average at 4,046

Based on yesterday’s performance on the 11 S&P sectors, only Materials recorded a gain of +0.35% and the other cyclicals sectors; Industrials, Financials and Energy were the worst performers for the day with losses of -1.44%, -1.67% and -2.56% respectively. What is the primary trigger that has led to two days of bloodshed in the US stock market that has created a negative feedback loop in the rest of the world? The inflation bogeyman.

China’s producer price index for April has risen to 6.8% year-on-year from 4.4% in March, its steepest pace of increase for factory gates prices since October 2017 which translates to more expensive consumer end products in the near future as business input costs increases. So far, the US central bank, the Fed has maintained its accommodating monetary policy stance and downplayed the risk of heightened inflation.

Given the latest set of inflation related data, a narrative has emerged that the Fed may start to give more hawkish guidance in the next FOMC meeting in June that led to yesterday’s profit taking activities on the cyclicals winners plus we also have a related  key economic data release later today at 1230 GMT, US CPI for April where the consensus estimate has been set at 3.6% year-on-year and core CPI at 2.3% year-on-year, its steepest rise since March 2020.

However, prices of several financial assets are not showing the actions of a hawkish Fed yet. Firstly, the US 2-year Treasury yield that is more sensitive to Fed’s monetary policies rose by only 1 basis points to 0.16% in yesterday’s US session that has remained below its 0.19% multi-month range resistance since August 2020. Secondly, in the corporation bond market where the higher yield corporate bonds will tend to face downside pressure if monetary policies are tightened due to their respective lower credit worthiness scores. In contrary, the performance of  a benchmark of high yield corporate bonds, the SPDR Bloomberg Barclays High Yield Bond ETF has not declined significantly yesterday, only a recorded a marginal loss of -0.11% to close at 108.73 and held above its 50-day moving average at 108.53. Thus, it seems that yesterday’s sell-off in the cyclical spectrum of the US stock market has been overblown and it is likely to be profit-taking activities rather than the start of a major risk-off domino effect.

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