by Pinchas Cohen
Key Events
Last night, trading ended the day on a sour note after US stocks failed to carry the bullish torch that was handed over from Asia, after most of the local benchmarks—including China's Shanghai Composite and Japan's TOPIX and Nikkei 225—rallied, though Hong Kong's Hang Seng and South Korea's KOSPI bucked the trend. European indices, such as the DAX and the STOXXEurope 600 kept the upward momentum going, save for UK shares.
The FTSE 100 defied the uptrend, a result of the stronger pound which would hurt exports of dollar-earning UK multinational corporations and make the country's stocks more expensive for international investors.
The tech selloff in the US was motivated by investors cycling out of this year’s biggest outperformers including Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN).
Global Financial Affairs
The Technology sector is up 30.85 percent YTD, significantly better than the S&P 500 benchmark’s 19.50 percent. As well, investors appear to be rotating out right now on a relative valuation basis.
Consensus is that non-tech companies will benefit more from tax cuts versus tech companies, which have already benefited from loopholes that have offered considerable leeway in how they report profits. The proposed tax cut currently on offer by Republicans is 20 percent, higher than the tech industry’s average effective rate of 18.5 percent.
Fundamentally, however, the value of these sold off tech shares hasn't changed. This selloff has all the telltale signs of a knee-jerk reaction by investors which then attracted the less savvy crowds. The NASDAQ 100 fell as much as 2.2 percent on an intraday basis, closing with a 1.71 percent loss.
Megacap shares of the FANGs dropped the most in almost two years. Contrarian investors who consider both fundamentals and technicals, while ignoring the crowds, would view this selloff as an excellent buying opportunity.
Outgoing Fed Chair Janet Yellen testified yesterday to the congressional Joint Economic Committee that she anticipates the central bank will resume its current path to higher interest rates while shrinking the balance sheet. This was backed up by the Fed’s Beige Book economic report which showed that the US economy grew at a modest-to-moderate pace through mid-November, amid price pressures—necessary for rising inflation, and a continued tightening of the labor market—necessary for higher wages.
Yellen’s rhetoric, bolstered by the data, boosted Financials, which have already been enjoying demand after Fed Chair nominee Jerome Powell signaled he won’t add to financial regulations. Indeed, his comments earlier in the week were the motivation behind European banks outperforming yesterday, adding to the sector's allure and making it the biggest beneficiary of the rotation out of Technology.
Financials rose 1.71 percent while Technology dropped 2.21 percent.
Unfortunately, neither Yellen's comments nor the positive Beige Book report were enough to boost the dollar, which fluctuated.
The greenback formed a High-Wave candle—high highs, high lows but a close near the opening price—in a clear sign that traders are leaderless on the currency. US 10-year Treasury yields however, popped 2.67 percent, the biggest rise since October 20.
Yellen also said the Fed would support faster economic growth caused by tax reform, provided it was the right kind of growth. This may have been veiled criticism that tax cuts are seen to contribute nothing to economic growth, only to equity prices. Of course, that might help stock owners, or the rich, but it would only widen the gap between the economic classes.
Yesterday’s US technology selloff spread through Asia this morning. Despite China’s official factory gauge, manufacturing PMI, unexpectedly rising, shares on both the mainland and in Hong Kong declined, in what may be an extension of its decline on regulations.
South Korea’s shares resumed yesterday’s tumble which started on North Korea jitters. Japan bucked the trend though, closing higher.
South Korea’s won fell after its central bank announced it would maintain its accommodation after raising rates for the first time in six years.
Even as the tech selloff appears to be spreading to Europe, defensive utilities have offset the declines, leaving the Stoxx Europe 600 little changed. The euro advanced ahead of a meeting between German Chancellor Angela Merkel and the Social Democrat leader Martin Schulz, a potential coalition partner.
The pound continues to move higher as the UK and the EU appear to be heading toward a compromise on the Irish border issue, the final sticking point before Brexit negotiations can resume.
Oil ended a three-day slide after OPEC and Russia appear set to announce mutual readiness to extend production cuts through all of next year.
Nickel has been leading industrial metals lower, into a fourth day of losses.
Up Ahead
- OPEC meets today in Vienna.
- Japan’s CPI, released this evening US time, may show a sharp divergence between national headline and core inflation, according to Bloomberg Intelligence.
- In China, the private Caixin manufacturing PMI is due on Friday.
- India updates on third-quarter GDP on Thursday.
Market Moves
Stocks
- The Stoxx Europe 600 Index fell less than 0.05 percent as of 8:16 (3:16) London time.
- The MSCI World Index of developed countries decreased less than 0.05 percent.
- The MSCI Asia Pacific declined 0.9 percent to the lowest in more than a week on the largest drop in more than two weeks.
- Japan’s Nikkei 225 Stock Average rose 0.6 percent to the highest in three weeks on the biggest advance in more than a week.
- The MSCI Emerging Markets Index dipped 1.4 percent to the lowest in more than two weeks on the largest decrease in more than six months.
- The U.K.’s FTSE 100 declined 0.4 percent to the lowest in two months.
- S&P 500 Futures increased 0.1 percent to the highest on record.
Currencies
- The Dollar Index rose 0.14 percent, and is trading at the height of the session at 93.39, as of 4:28 AM, challenging yesterday’s 93.43 high price.
- The euro climbed 0.1 percent to $1.1857.
- The British pound gained 0.4 percent to $1.3458, the strongest in more than two months.
- The Japanese dipped 0.3 percent to 112.32 per dollar, the weakest in more than a week.
Bonds
- The yield on 10-year Treasuries rose less than one basis point to 2.39 percent, the highest in more than two weeks.
- Germany’s 10-year yield climbed two basis points to 0.40 percent, the highest in more than two weeks.
- Britain’s 10-year yield increased three basis points to 1.338 percent, reaching the highest in five weeks on its fifth straight advance.
Commodities
- West Texas Intermediate crude climbed 0.2 percent to $57.43 a barrel.
- Gold fell 0.2 percent to $1,281.92 an ounce, the weakest in more than a week.