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Yellen put; industrial & materials the next outperformance theme

Yesterday’s major news flow for the markets was not coronavirus vaccine optimism from one of the leading forefront vaccine developers, despite AstraZeneca/Oxford University reporting its Covid-19 vaccine showed an averageefficacy of 70% in trails, and with a 90% effective rate if the vaccine was administered differently.

Instead, the potential appointment of former Federal Reserve chair Janet Yellen as the next US treasury secretary stole the headlines. Her latest public comments were in favour of more fiscal stimulus in order to jump-start a soft economy and combat the risk of a double-dip recession, after infected coronavirus cases rose at a rapid pace in US and Europe over the past two months.

Value, cyclical and US domestically-oriented stocks were rejuvenated, where the Dow Jones Industrial Average and Russell 2000 surged by 1.1% and 1.9% respectively, while the big tech-heavy S&P 500 (+0.6%) and Nasdaq 100 (almost unchanged) lagged behind. Shares of several key ‘stay home” stocks such as Zoom (-2.1%), Netflix (-2.4%) and Docusign (-2.0%) continued to see downside pressure. S&P sectors were also pointing to outperformance in value/cyclical theme plays, as energy (+7.1%), financials (+1.9%) and industrials all rose (+1.6%).

Even though the information technology sector remained lacklustre (-0.03%), there were bright spots within its industries such as smiconductors, where the PHLX Semiconductor Index ETF advanced by +1.4% (352.32) and made a fresh all-time closing high yesterday. One potential fundamental driver that supports the ongoing positive tone seen in semiconductor stocks is the higher chance of more fiscal stimulus packages implemented by major governments worldwide, coupled with more positive vaccine developments that will probably increase capital investment or maintenance on corporates’ technology hardware equipment and internet-related products.  

In forex, a significant observation to note is the movement of the US Dollar Index, after it attempted to break below the 92.15 major support (the ascending trendline in place since April 2011), printing an intraday low of 92.02 during the European session before a reversal took shape in the US session, and the index closed at 92.50. Coupled with a daily 'spinning top' candlestick at the 92.15 major support, there is a potential bullish reversal for the US Dollar Index to retest the 94.65 range resistance in place since 25 September.

Also, the spread of the US Treasury 10-year yield over the German Bund and UK Gilt has started to widen over its closing levels from last Friday, supporting the current USD bullish reversal. In a nutshell, there is a short- to medium-term potential US Dollar Index recovery, but longer-term outperformance remains muted due to a potential wider budget deficit and with the Federal Reserve’s loose monetary policies likely to remain for at least another year.

S&P industrial select sector (XLI) chart

The S&P indutstrial select sector (XLI) is poised for potential new all-time highs.

Source: CMC Markets

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