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Main U.S. indexes green, but well off highs
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Tech leads S&P 500 sector gainers; materials weakest group
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Dollar, gold slip; crude, bitcoin up
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U.S. 10-Year Treasury yield ~flat at ~3.96%
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IT'S NOT THE DEBT-CEILING DONNYBROOK THAT MATTERS, IT'S THE LEVEL OF DEBT (1330 EST/1830 GMT) Whether or not the U.S. raises its debt ceiling may come down to the wire, but as Philip Palumbo, founder, CEO and chief investment officer at Palumbo Wealth Management, sees it, the risk is not that we fail to raise the debt ceiling; the risk is that we fail to adequately address our rapidly growing debt level and send the U.S. toward a downward economic spiral. Palumbo's view is that the U.S. will not default on its debts, at least not now, but partisan politics "apparently requires Congress to wait until the very last moment in hopes of gaining some advantage with the electorate," despite the fact that he sees no political winners in debt ceiling dramas. According to Palumbo, the U.S. dollar's status as the world’s reserve currency is at risk on several fronts, and the debt issue is one of them. "The debt ceiling is important because each time we reach it, we are given another opportunity to focus on the mounting debt problem this country faces. The real issue is how to stop the seemingly inexorable increase in the Federal debt, which the non-partisan Congressional Budget Office (CBO) now estimates will climb from the current 98% of GDP to 118% of GDP by 2033." Palumbo believes that the preferred answer to the debt problem is faster economic growth to pay for it. However, if the level of debt is now at a point where it begins to restrict growth, the opportunities to grow out of the problem begin to diminish.
(Terence Gabriel)
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TOO SOON TO PILE INTO BROAD TECH UNIVERSE? (1220 EST/1720 GMT) It may be too soon to start piling back into technology shares across the board, according to strategists at Morgan Stanley. They wrote in a note Monday that tech's bottoms tend to coincide with the market's bottom, and a "durable trough" for the current bear market in U.S. stocks has likely not happened yet. On Monday, the S&P 500 tech index was up 1.5% in afternoon trading and leading gains among S&P 500 sectors on the day. The sector is up 14% year-to-date compared with a 6% gain in the S&P 500 . Within tech, the strategists wrote, entertainment, internet retail and software stocks tend to outperform the broader market in the three months before the bear market bottom, while tech hardware and semiconductor stocks tend to underperform in that period. The outlooks for earnings and the Federal Reserve's rate hikes are among the biggest risks to the overall market right now, the strategists noted, and said "tech faces tactical headwinds as well, which reduces the likelihood... that it already made its low ahead of the market." However, tech has a "strong track record" of outperforming once the lows are in, they wrote. "12 months post the trough, 8 out of 10 Tech subgroups post positive relative returns, on average," they noted. "The strongest relative returns come from Internet Retail, interactive Media & Services, Semis, and Tech Hardware."
(Caroline Valetkevitch)
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SOFT NEWS IS GOOD NEWS: FACTORY ORDERS DIP AS EXPECTED (1118 EST/1618 GMT) U.S. economic data on Monday picked up on a theme coming out of China, which issued growth estimates at the low-end of expectations: demand is softening.
New orders for merchandise from U.S. factories fell in January by 1.6%, shallower than the 1.8% drop analysts expected. The decline reverses December's downwardly revised 1.7% gain, and supports the notion that Powell & Co's hawkish efforts to rein in inflation by tossing a bucket of cold water on the economy could be having their desired effect. "(Signs that) the economy is slowing (are) good for the belief that inflation is going down, which supports the belief that which means we could getting close to the end of the (Federal Reserve’s) interest rate hike cycle," says Peter Tuz, president of Chase Investment Counsel. The graphic below compares factory orders with the Institute for Supply Management's purchasing managers index (PMI), which shows the U.S. manufacturing sector, which accounts for about 11% of the economy, has been in contraction for four consecutive months:
The Commerce Department's report also held steady its initial reading on new orders for core capital goods at a 0.8% gain. Core capital goods, which excludes aircraft and defense goods, is viewed as a proxy for business spending plans.
Hopes that there's light at the end of the rate hike tunnel is boosting interest-rate sensitive mega-cap stocks, which is sending the indexes higher. All three major U.S. stock indexes are higher in morning trading, with the S&P 500 and the Nasdaq on track to notch their third straight session in the green.
(Stephen Culp)
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MUTUAL FUNDS TO BECOME MORE OVERWEIGHT FINS, UNDERWEIGHT TECH WITH MAR 17 GICS CHANGE -GS (1053 EST/1553 GMT)
On March 17, S&P Dow Jones and MSCI will dissolve the data
processing & outsourced services group within the S&P 500 tech
sector and reallocate its members into the financial and
industrials sectors.
David Kostin, chief U.S. equity strategist at Goldman Sachs
(GS), says that the reclassification will add several growth
stocks to the traditional value stocks in financials. Visa , Mastercard , and Paypal , the three largest
stocks affected, will comprise 16% of financials cap.
Kostin offers three takeaways:
(1) Macro correlations of the financials sector will change
"modestly," but the sector will remain cyclical and positively
correlated with interest rates
(2) Implied mechanical net ETF flows for stocks across
affected sectors will represent less than 1% of market cap
(3) Mutual funds will become more overweight financials and
more underweight tech
(Terence Gabriel)
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U.S. STOCKS KICK OFF EVENT-FILLED WEEK TO THE UPSIDE (1015 EST/1515 GMT) The main U.S. indexes are higher early on Monday as Treasury yields pulled back further ahead of Federal Reserve Chair Jerome Powell's testimony and jobs data this week that could offer fresh cues on the trajectory of interest rates. The U.S. 10-Year Treasury yield is edging down to around 3.94% from Friday's 3.9630% close. Although early in what will be an event-filled week, with this turn, the yield's six-week win streak is in jeopardy. A majority of S&P 500 sectors are higher with tech leading gainers.
With this, growth is slightly outperforming value , and attempting to build on its two-week relative win streak. Here is a snapshot of where markets stood around 1015 EST:
(Terence Gabriel)
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WHO RUNS THE WORLD? GIRLS! BUT HOW MUCH OF WALL STREET DO THEY RUN? (0945 EST/1445 GMT) About 30% of S&P 500 companies have women on their boards, according to BofA Global research, which is double the figure compared with a decade ago.
But despite having more women on boards, the proportion of female executives remains low - just under 7% for female CEOs or equivalent.
This issue also has a sector-specific layer.
While old-economy companies in sectors such as energy , utilities and financials have better diversity and inclusion (D&I) policies, companies in new-economy sectors like healthcare , technology and consumer discretionary have a higher proportion of women in their workforce and on their boards. The parity between genders, however, isn't just a sociological discussion. Analysts at BofA say that the return on equity (ROE) has been higher for companies with over 25% female executives (compared to the rest of the S&P 500) in nine of the past 10 years. More precisely, gender diversity on the board correlates with 19% higher ROE in the subsequent year and 43% lower earnings risk in the subsequent three years.
Inclusion drives up perspectives and innovation, navigating better performances from companies. And BofA cites a 0.8% increase in EBIT (earnings before interest & tax) for every 10% increase on diversity metrics.
However, pay gap and the disproportionate impact of inflation pose a risk to what could be a rosy scenario.
While women have lower representation in "high-paying" industries that are more cushioned against inflation pressures, in others, increased cost pressures means D&I budgets are sometimes the first to go. So it circles back to "two steps forward and one back."
(Shristi Achar A)
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U.S. 10-YEAR TREASURY YIELD: SPIKE AND REVERSAL (0900 EST/1400 GMT) The U.S. 10-Year Treasury yield spiked to a multi-month high last Thursday. However, by Friday, it was back down, testing swing support. Now early in the new week, which includes event risks such as Fed Chair Powell's congressional testimony on Tuesday and Wednesday, and Friday's February non-farm payroll report, the yield is nudging below the lower-end of the support band:
Amid concerns that the Federal Reserve will need to continue to raise rates and keep those rates higher for longer, the 10-year yield jumped to a high of 4.0930% last Thursday. However, it reversed sharply by Friday, ending the week at 3.9630%. Despite the reversal, the yield did eke out a sixth-straight weekly rise. However, on Monday, the yield has now declined further to around 3.91%. With the reversal, the yield has fallen back below the 23.6% Fibonacci retracement of its 1981-2020 yield bear market at 3.9765%. Additionally, the yield is now back below a weekly Gann Line at around 3.96%. Thus, the six-week win streak is in jeopardy. Of note, since the yield's March 2020 record-low, once concluded, pronounced weekly winning streaks have marked some significant highs. This was the case with an eight-week win streak which ended on March 19, 2021, a seven-week run of gains that ended on Oct. 8, 2021, and a 12-week win streak that ended on Oct. 21, 2022. As long as the yield holds below 3.9630%, pressure may mount for a deeper retreat to 3.70%, then the 3.55%-3.40% area as a number of weekly Gann Lines are providing yield support in this zone. The yield's mid-January trough was at 3.3210%. Another thrust above 3.98%, however, can instead put traders on guard for the yield to challenge the 4.27%-4.3380% area. This zone includes another weekly Gann Line as well as the October 2022 high.
4.3380% was the highest level since November 2007, and it protects against the potential for a further rise to the 5%+ area.
(Terence Gabriel)
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
