Disparity between technology and value stocks widen
Europe’s major stock indices rose further this morning, although concerns over the overvalued technology sector remained after Tuesday’s slump amid rising yields. Shortly after the European open, the major indices were up between 0.2 to 0.6 percent, with the likes of the German DAX and UK’s FTSE 100 hitting new highs on the year. US futures were mixed with the Nasdaq again underperforming after it slumped 1.35% in the previous session. Germany’s Tech 30 Index was up only modestly after it too had slumped sharply in the previous session.
Overall, risk appetite remains positive with investors choosing to move into stocks that are sensitive to economic growth and those that are relatively less expensive or have higher dividend yields. The biggest driver behind this is relief that Omicron is not as deadly as Delta, which is fuelling expectations that travel restrictions and lockdowns will be lifted soon. Omicron’s rapid spread means cases will likely peak very soon in Europe and given that it doesn’t cause too many people severe illnesses to require hospitalisation, it is boosting the prospects of herd immunity.
First glimpse of taper tantrum as Nasdaq drops
The selling of shares in the technology sector has provided us with the first glimpse of taper tantrum this year. While both the S&P 500 and Down Jones have rallied to fresh uncharted territories this week, the Nasdaq 100 didn’t quite make it and the tech-heavy index has now turned negative on the year. Admittedly, the year has just begun, but after 5 years of outperformance any signs of weakness should be taken seriously as for the first time in a few years, the Fed is tightening monetary policy. While it remains to be seen whether a full-blown correction is imminent, the overvalued tech sector would do well to consolidate its multi-year gains without giving back a significant chunk of its gains, while value stocks — those with a relatively higher dividend yield or comparatively lower price-to-earnings ratio — potentially catch up.
ADP and FOMC meeting minutes eyed
Investors are becoming increasing convinced that the FOMC will raise rates three times in 2022, beginning in May. This is because inflation has surged to multi-decade highs and the Fed simply cannot allow price pressures to rise further and get out of hand. The FOMC has already announced it will be wrapping up its bond purchases by March. Minutes of the Fed’s December meeting, when the central bank announced it would be winding down bond-buying quicker, will be closely watched later on. Investors will want to know whether policymakers had already discussed plans around hiking interest rates. If so, this could provide fresh impetus for the dollar bulls and Nasdaq bears.
Ahead of the FOMC minutes at 19:00 GMT, we have ADP Non-Farm Employment Change at 13:15 GMT. The latter is going to provide us a strong clue about the health of the employment sector, ahead of the official
non-farm jobs report on Friday.
Keep an eye on yen pairs
With interest rates set to increase in the US, bond yields have started to climb higher again, weighing on the appetite for low-dividend-yield growth stocks and currencies where the central bank is likely to keep monetary policy loose for longer, such as the Japanese yen. The latter fell to a 5-year low against the dollar on Tuesday before rebounding slightly. The yen has also fallen sharply against other major currencies as the disparity in interest rates between Japan and the rest of the developed world grows larger. This should cause the yen to weaken further in the coming sessions, so long as risk appetite does not turn sour.
Q1 outlook
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Source for all charts in this article: ThinkMarkets and TradingView.com