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Rest of the world outperformance reinforced by weaker USD

Yesterday saw a second consecutive day of profit-taking and consolidation for US stocks. All major US benchmark stock indices ended in the red: the S&P 500 fell -0.85% to 4,127, with a similar decline of -0.72% seen in the Nasdaq 100 to close at 13,217, which has also failed to close above its 50-day moving average (13,433) since 11 May.

Prior sessions cyclical heavy-weighted outperformer, the Dow Jones Industrial Average, was not spared either with a loss of -0.78% to 34,060, but it has still managed to trade above its 50-day moving average (33,544) since 2 February. The small-caps index Russell 2000 also ended with a loss of -0.73% to 2,210, and has been evolving in a three-month sideway range configuration, its longest streak of trendless movement since the start of its major uptrend phase from the 18 March 2020 low.

Lacklustre performances were also seen in the S&P sectors; only two out of the 11 sectors recorded marginal gains. Real estate rose +0.17% and healthcare gained +0.05%, with underperformers in cyclicals/value; energy (-2.63%), industrials (-1.47%) and financials (-1.35%). On the positive side, readings from market-breadth indicators were not so bad, with the ratio of advancing versus declining stocks listed on the NYSE at 0.86, while the number of advancing stocks listed on Nasdaq were almost on a par with declining stocks.

There were two possible negative narratives that triggered yesterday's broad-based weakness in US stocks. April's US housing starts fell -9.5% month-on-month from +19.8% in the previous month. Secondly, Iran may start to increase its oil production, as reported by several media reports, leading to a decline of -1.1% in WTI crude futures, which closed yesterday’s US session at US$65.51 per barrel after a test on the US$66.60 major resistance in place since April 2019, prompting a negative feedback spiral into energy-related stocks.

Despite the overnight weakness seen in US stocks, there was a sparkle of light in international stocks (excluding the US) from the performances of their respective exchange-traded funds (ETFs) listed on the US stock exchanges. The iShares China Large-Cap (FXI) gained +0.81%, KraneShares CSI China Internet (KWEB), a proxy of China big tech added +1.56%, iShares Asia Ex Japan (AAXJ) was up +1.38%, iShares Emerging Markets (EEM) (+1.34%) and iShares Core MSCI Europe (IEUR) added +0.12%.

Their respective outperformance against the US benchmark stock indices can be explained by the ongoing US dollar weakness in place since the start of Q2. The US Dollar Index, a measurement of USD against a basket of major currencies, declined by -0.4% overnight to 89.78, its lowest level since 13 January, and it has recorded an accumulated decline of -3.91% from its 31 March high of 93.43. Technically speaking, medium-term downside momentum has been building-up, and may see an impulsive down move sequence for the US Dollar Index, which translates to further USD weakness in the coming months. This could imply a potential outperformance in the rest-of-the-world stocks theme play.

Also in Asia, do watch the 6.40 major support of the USD/CNH (offshore yuan) in place since January 2014. A break with a weekly close below 6.40 may reinforce the positive feedback loop into Asia (excluding Japan) and emerging markets stocks in general.

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