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Is Singapore STI outperformance a leading indicator for cyclical stocks?

Most major Asian benchmark stock indices managed to fight back the bearish pressure inflicted on them yesterday, and inched back to positive territory as at today’s Asian mid-session.

As at today’s mid-session, Japan’s Nikkei 225 was +0.31% (28,635), China’s CSI 300 +0.11% (5,519) and Hong Kong’s Hang Seng Index +0.3% (29,480). As for the Hang Seng TECH Index, the barometer for China big tech, it managed to trim earlier losses of -3.6% to -0.86% (9,882). South Korea’s KOSPI 200 and Australia’s ASX 200 had recorded losses of -0.5% (424.57) and -0.6% (5,510) respectively. The star performer so far was Singapore’s STI +0.65% (2,965) led by its cyclical/value-oriented constituents stocks: Venture (manufacturing) +1.96%, OCBC Bank (financials) +1.83% and Genting Singapore (casino/integrated resort) +1.74%.

In the last five trading days in the US stock market, cyclical, value and small caps heavy-weighted benchmark indices have underperformed. The Dow Jones dropped -0.85% and the Russell 2000 -0.5%, while big tech-concentrated indices have outperformed. Today though,the S&P 500 is down (-0.06%), with the Nasdaq 100 up +1.4%.

As previously highlighted, the current gains in US big tech stocks have been triggered by a herding behaviour kick-started by Netflix's rally of +17% on 20 January. This created a positive feedback loop into the rest of the big tech cohort (Apple, Facebook, Amazon, Google/Alphabet & Microsoft), as their respective share prices had entered into a consolidation range since September until early January.

The current positive momentum in these big tech stocks is in anticipation of better-than-expected earnings announcements or positive guidance out this week on Apple, Microsoft and Facebook. Microsoft reported better-than-expected earnings after the close of yesterday’s US session: $2.03 EPS versus $1.64 EPS consensus, helping the stock to record a +4.29% rally ($424.40) in the after-hours session, after it closed with a gain of +1.22% ($232.33) at the end of the US session. Next up will be Apple, Facebook and Tesla's earnings announcements after the US close today.

Bearing in mind, we will also have the US Federal Reserve FOMC monetary policy outcome and Chairman Powell’s press conference later today (3am Singapore time). Traders will be paying very close attention to any hints of tapering on the Fed’s current bond buying programme, which is one of the main liquidity drivers that support the major uptrend since in risk assets since March 2020. Interestingly, US Treasury 10-year yields had inched downwards in the past two weeks, from a high of 1.18% on 12 January, it shed -15 basis points to a low of 1.02% yesterday.

Market participants have almost priced-in a “no tapering” initiative by the Fed later, and if there are any sentences in the Fed’s FOMC statement or during Powell’s press conference that indicate a status quo on the current pace of the Fed’s bond purchase programme, and added some hints of confidence that the US economy is on a path of slow recovery, the US 10-year yield may see an uplift, as it is now trading very close to a key medium-term support at the 0.95% level. If such a scenario happens, cyclical, value and small caps stocks may be back in vogue again. Perhaps, the current intraday outperformance seen in the Singapore’s benchmark index, the Straits Times Index (STI) can be considered as a leading indicator, as the STI is considered as a cyclical/value play; similar to the positive feedback loop seen in big tech triggered by Netflix’s prior +17% rally .  

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