The reflation trade is full on, as investors are migrating from growth to value stocks in a fast fashion, leaving their favorite tech darlings abated by aggressive waves of sell-off. And the index performances summarize well the underlying migration. Nasdaq closed Monday’s session 2.41% lower, while the Dow ended near 1% higher, reaching a new all-time record regardless of its tech peers’ despair.
Apple and Netflix plummeted more than 4%, Facebook dived 3.39% and Amazon fell 1.62%
Tesla plunged another 5.84% eating up all gains recorded for the past three months.
The aggressive portfolio rotation benefited to consumer staples, to banks and to some extend to the energy sector.
And the common denominator behind the mass move is the rising inflation expectations, that spur the expectations of a more hawkish Federal Reserve (Fed) outlook and a less cheap liquidity in the market. So, the best refuge for the rising financial costs are companies with concrete foundation that offer a solid potential for strong profits with economic recovery. And this is why value stocks are about to become investors’ new darlings, as they offer the most wanted and the most needed safety net to tightening financial conditions.
As such, the US 10-year yield sticks around the 1.55-1.60% area, and more importantly, the Fed is not willing to move an inch for now as Joe Biden’s $1.9 trillion aid package is making big and loud steps toward the street. And US Treasury Secretary Janet Yellen shares Jerome Powell’s view that the massive fiscal aid, combined to the massive monetary stimulus won’t result in an overheating in the economy. It is yet to be seen, but investors can never be too cautious. Prevention is better than cure.
Renault gained near 4% in Paris on Monday as JP Morgan revisited its target price to 69 EUR, 72% higher than where it is right now despite the company reporting a record loss of 8 billion euros for 2020 and its warning that the 2021 won’t be an easy ride either, due to a scarcity in semiconductors which adds to the cost of making a car and a layer of complexity for the company to return to profit. In the context of the actual portfolio rotation, the big automakers, including Volkswagen and Renault could be interesting buys at the current prices, if they manage their own rotation from fossil-fueled cars to electric cars properly. In this respect, Renault is a good student, its Zoe is one of the most popular plug-in cars in France, although it fell behind Peugeot’s e-208 at the beginning of this year.
In the FX, the reflation trend translates into a stronger US dollar.
The EURUSD is preparing to test the 1.1815/1.1800, a zone including the 200-day moving average. Given the oversold conditions in EURUSD, there could be a tactical dip-buying opportunity for day traders. However, the upside potential will likely remain limited as the big picture suggests a further wining in speculative euro longs. And given the solid pool of euro long positions in the market, there is potential for a deeper downside correction in the single currency. The EURGBP on the other hand is about to have a grip on the 0.85 mark for the first time in a year.
Gold finds buyers near the $1680 per oz, but the appetite for inflation-hedges remain under the shadow of rising opportunity cost of holding gold due to the looming risk of a steep rise in sovereign yields with this week’s US inflation report, due Wednesday.
WTI crude tested $68 per barrel following an attack on the Saudi Ras Tanura oil terminal. Rising tensions should keep some upside pressure on short-term oil prices along with the OPEC+ latest decision to maintain its production-cut regime tighter than expected, but the kneejerk jump in oil prices is probably mostly done, as undamaged facility will have no impact on global oil supply.