The Covid-19 vaccine optimism risk-on trade has continued to be in the vogue for the second consecutive day, though at a slower pace. The Dow Jones Industrial Average and Russell 2000 advanced by 0.9% and 1.9% respectively, while the more mega tech-heavy weighted indices, S&P 500 and Nasdaq 100, declined by -0.1% and -1.7%.
S&P sectors intraday performance continued to be in favour for value/cyclical/defensive oriented stocks where energy (+2.5%), consumer staples (+2.0%) and industrials (+1.8%) took leadership positons while information technology (-1.9%) continued to underperform.
All in all, the reflation-themed play has been intact if we remove the 'noises' from last 2 weeks of political drama inherent from the US presidential election. In fact, the main catalyst that triggered the current bout of outperformance in value/cyclical-oriented stocks is the rate of change of the US Treasury 10-year yield, where its trend has been increasing steadily since 5 October.
Interestingly based on sector rotation analysis from a longer-time horizon perspective, outperformance of materials and energy (cyclical sensitive sectors) over the S&P 500 has tended to occur in the late stage of a long-term secular bullish phase in the stock market. For instance, the previous secular bull market peak of the S&P 500 occurred in October 2007, while materials and energy continued to outperform in the next 7 to 8 months and peaked later in May 2008 and June 2008 respectively.
The US dollar was almost unchanged against the majors as indicated by the US Dollar Index and a significant observation to note; it had tested and managed to bounce off from a long-term major ascending trendline in place since April 2011, with the low now acting as a support at 92.80 on Monday for the second time in three months since early September 2020.
In contrast, the USD/CNH (offshore yuan) continued to tread lower and ended yesterday’s US session at 6.5969, a low not seen since July 2018. In addition, the current bounce on Gold futures (COMEX) is still below a short-term resistance zone of 1,893/1,907 after Monday’s steep drop to retest its September 2020 swing low area of 1,850.
Asian stock indices are exhibiting mix performances, with Japan’s Nikkei 225 (+1.5%), South Korea’s KOSPI 200 (+1.2%) and Australia’s ASX 200 (+1.26%) posting solid gains, while underperformers are Hong Kong’s Hang Seng Technology Index (-3.6%), the Hang Seng Index (-0.07%), China’s CSI 300 (-0.3%) and Singapore’s Straits Times Index (-1.0%).
Chart of the day: EUR/USD major resistance at 1.1860Source: CMC Markets