Investors focus on market trends: Second quarter

NEW YORK (Reuters) – The first quarter of 2021 kept investors on their toes as it served up surging yields, an accelerated rotation into cyclical stocks and wild rides in the shares of GameStop that brought the retail investors of WallStreetBets into the public eye.

Here are some trends investors are positioning for in the second quarter, and how they could impact broader markets.

(Graphic: Fast and furious – )

Reuters Graphic

HIGHER YIELDS

The yield on the benchmark 10-year U.S. Treasury rose by about 80 basis points in the second quarter – its third-largest quarterly increase over the past decade – as investors sold bonds in anticipation of a U.S. economic recovery and higher inflation.

Many investors believe the move will continue – Goldman Sachs sees the yield at 1.9% by the end of 2021, while TD Securities expects yields to rise to 2%.

The move “is happening, we believe, for the right reasons,” said Gargi Pal Chaudhuri, head of iShares investment strategy, Americas at BlackRock.

Chaudhuri believes further upside in yields is unlikely to derail a rally that took the S&P 500 to a fresh record on Wednesday, as yields are rising from “very, very low levels.”

Others are less certain. Forty-three percent of investors in the most recent BofA Global Research fund manager survey said 2% on the 10-year could trigger a selloff in stocks.

(Graphic: A buck short – )

Reuters Graphic

RESURGENT DOLLAR

Rising yields have helped lift the dollar to its highest level in nearly 17 months, and some investors have positioned for more dollar strength ahead: net bets on a weaker dollar in futures markets stood at $10.3 billion, about a third of their mid-January value, the latest data from the CFTC showed.

A strengthening dollar could weigh on the profits of U.S. multinational companies and spell bad news for the recent commodities rally that has pushed up prices for everything from oil to copper and iron ore.

(Graphic: Value vs growth – )

Reuters Graphic

MORE VALUE

Expectations of a U.S. economic revival have boosted the so-called reopening trade in recent months, fueling rallies in the shares of banks, energy companies and other areas that have for years lagged behind growth and technology stocks.

The Russell 1000 value index rose 11% in the first quarter against its growth counterpart’s gain of 1%, continuing a trend that started at the end of 2020.

“If a new paradigm emerges, consisting of sustainably higher nominal growth and higher yields, the value trade could run for years,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a recent note.

Hiccups in the U.S. reopening effort, however, could reinvigorate the appeal of tech, sending investors back to the stocks that have led markets higher for years.

(Graphic: Volatility recedes – )

Reuters Graphic

LOWER VOLATILITY

The quarter also marked a much-awaited drop in investors’ expectations for stock market gyrations. The Cboe Volatility Index – known as Wall Street’s fear gauge – recently traded just below 20, down from a near-record of 85.47 a year ago.

The decline reflects investors’ expectations that the recent gains in stocks are likely to stick, said Brian Overby, senior options analyst at Ally Invest.

The index remains above its long-term median of 17.5, likely a result of some investors hedging their stock positions using S&P index options, Overby said.

(Graphic: Up, up and away? – )

Reuters Graphic

INFLATION

Although inflation has consistently averaged below the Federal Reserve’s 2% target in the last decade, trillions of dollars in government spending have revived discussions of its return.

One measure of inflation, which tracks the expected average rate over the five-year period starting five years from now, is at 2.16%, the highest since December 2018.

The latest survey by BofA Global Research, meanwhile, showed fund managers see a rise in inflation – which could weigh on the dollar and erode demand for longer-dated bonds – as the market’s biggest “tail risk.”

Wall Street: US stock exchange data analysis

NEW YORK (Reuters) – U.S. stocks ended down slightly on Tuesday, with investors selling tech-related growth shares after U.S. Treasury yields hit a 14-month high.

At the same time, the S&P 500 financials, industrials and consumer discretionary sectors rose, extending the recent rotation out of growth and into so-called value names.

Tech shares trimmed losses in afternoon trading with Treasury yields off the day’s high, but the S&P technology sector ended down 1% on the day and was the biggest drag on the S&P 500. The Nasdaq was on track for its first monthly loss since November following the recent rise in yields.

Tech stocks, which have a low-rate environment heavily baked into their pricey valuations, have been among the hardest hit by the rise in yields.

“It’s somewhat of a leadership-less market,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. “Investors’ preferences are flipping around here almost on a daily basis, primarily between tech plus and cyclicals.

“Cyclicals have certainly had the upper hand here for a while, trading off the reopening of the economy. Tech plus holds in there because it’s really the promise of the future – it should provide investors with steady growth.”

The 10-year U.S. Treasury yield rose to 1.776% in early London trade, its highest since Jan. 22. But the yield reversed and was lower in late New York trading as traders prepared for quarter-end.

The Dow Jones Industrial Average fell 104.41 points, or 0.31%, to 33,066.96, the S&P 500 lost 12.54 points, or 0.32%, to 3,958.55 and the Nasdaq Composite dropped 14.25 points, or 0.11%, to 13,045.39.

President Joe Biden on Wednesday will unveil more details about the first stage of his infrastructure plan, which could be worth as much as $4 trillion.

A leading value index was up 0.1% while a growth index shed 0.6% in a continuation of a trend since late last year.

“For the next day or two, (value stocks) will probably be leaders because we have quarter-end and institutions want to make sure that they have exposure to the names that performed well,” said Robert Pavlik, senior portfolio manager at Dakota Wealth in New York.

Bets on a swift economic rebound backed by vaccine rollouts and unprecedented stimulus have helped the S&P 500 and the Dow hit record closing highs recently.

Bank stocks rebounded as investors took heart from signs that the impact from the fall of a U.S. hedge fund did not ripple out to broader markets.

Wells Fargo & Co shares jumped 2.5% after the lender said it had a prime brokerage relationship with Archegos Capital and that it no longer had any exposure and did not experience any losses.

Advancing issues outnumbered declining ones on the NYSE by a 1.48-to-1 ratio; on Nasdaq, a 1.47-to-1 ratio favored advancers.

The S&P 500 posted 32 new 52-week highs and no new lows; the Nasdaq Composite recorded 49 new highs and 73 new lows.

Volume on U.S. exchanges was 10.29 billion shares, compared with the 13.5 billion average for the full session over the last 20 trading days.

GameStop soars 32%, leads meme stocks higher with Koss, AMC surging too

Shares in GameStop and other so-called meme stocks popular among members of Reddit’s WallStreetBets forum jumped on Thursday as investors bought shares whose prices tumbled in the previous session.

Shares in video-game retailer GameStop were last up 32.1% at $159.02 with brisk trading volume, erasing much of the previous session’s 33.8% decline after the company said it was evaluating the possibility of a share sale.

Volatility has spiked this year in GameStop shares, which have risen from just $18.84 at the end of 2020 and reached a record high of $483 in late January before falling sharply and then kicking off another rally in late February.

The company has benefited from a push by retail investors such as Reddit members to drive up prices of heavily shorted stocks.

Investors have also been eyeing efforts by billionaire investor and Chewy Inc co-founder Ryan Cohen, who is on GameStop’s board, to transform the retailer into an e-commerce firm that can take on big-box store rivals such as Target Corp and Walmart Inc.

Shares in headphone maker Koss Corp were up 30.5% at $21.44 with volume surpassing twice the 10-day moving average. The stock had fallen almost 22% on Wednesday.

Cinema operator AMC Entertainment Holdings Inc were up 15.9% at $10.45 after falling 36% in the last four sessions with Disney’s announcement on March 23 that it was delaying the release of Marvel Studios film “Black Widow” by two months until July and planning a simultaneous theaters and Disney+ streaming release.

Futures point to gains for tech-related stocks as bond yields ease

(Reuters) – Futures tracking the S&P 500 and the Nasdaq rose on Monday, with heavyweight technology stocks set to rebound after a surge in bond yields in recent weeks sparked a flight from richly valued equities.

A sharp run up in Treasury yields since mid-February has dictated the course of equities trading, while weighing on high-growth tech stocks, whose valuations look stretched.

Futures tied to the tech-heavy Nasdaq 100 climbed about 0.9% to start the week. The index is still down more than 6% from its Feb. 12 record closing high.

The S&P 500 and the Dow, however, clinched all-time highs as early as last week on bets that stimulus and vaccine rollouts would lead to a strong rebound in the U.S. economy.

Kansas City Southern jumped about 17% after Canadian Pacific Railway Ltd agreed to acquire the railroad operator in a $25 billion cash-and-stock deal to create the first railway spanning the United States, Mexico and Canada.

At 06:34 a.m. ET, Dow E-minis were down 79 points, or 0.24%, S&P 500 E-minis were up 1.75 points, or 0.04% and Nasdaq 100 E-minis were up 106.75 points, or 0.83%.

Intel Corp, Microsoft Corp and Apple Inc led gains among Dow components in trading before the bell.

Big U.S. lenders including Goldman Sachs, Citigroup and Bank of America, which have enjoyed a rally on brightening economic prospects, slipped about 1% each.

The iShares MSCI Turkey ETF sank about 19% as President Tayyip Erdogan’s decision to oust a hawkish central bank governor sparked fears of a reversal of recent rate hikes.

Wall Street’s year of bust and boom

NEW YORK (Reuters) – Wall Street giddyness in recent weeks stands in stark contrast to the pandemic panic of one year ago.

U.S. stocks on Tuesday will mark the one-year anniversary of the market low as the spread of the COVID-19 and government lockdowns began to crush economic activity, before massive government and central bank stimulus plus the development of vaccines fueled a stunning, if uneven, rebound.

As investor optimism grew, stocks began to recover from the selloff that ended an 11-year bull market, history’s longest.

The S&P 500 bottomed by closing at 2237.40 on March 23, and topped the Feb. 19, 2020 bull-market high on Aug. 18, when the index ended the session at 3389.78. That high marked the end of the shortest bear market ever and confirmed that on March 23 a new bull had been unleashed.

GRAPHIC: One year off the low –

Reuters Graphic

Initial lockdowns hit customer-facing services sectors the hardest as social distancing mandates to curb COVID’s spread shuttered restaurants and slammed the travel and leisure industry.

Jobs in these sectors – typically on the lower end of the wage scale – evaporated overnight, and as new coronavirus infections spiked and abated, those jobs have been slow to return.

Conversely, the shutdown caused consumer demand to shift from services to goods, boosting resilience of U.S. factories and prompting a restoration of manufacturing jobs that outpaced the whole.

GRAPHIC: Payrolls during COVID –

Reuters Graphic

Along with the stimulus supplied by the U.S. Federal Reserve and the government, stocks worked their way off the low thanks in part to the start of vaccine rollouts and optimism that economic reopenings were on the horizon.

But companies that commanded attention during the beginning of the pandemic, so called “stay-at-home” plays such as Amazon, Zoom Media and Teladoc saw their fortunes begin to turn in the latter stages of 2020, with cyclical sectors such as energy, materials and small cap stocks garnering more favor.

GRAPHIC: Equity performance breakdown from March low –

Reuters Graphic

As optimism about reopenings began to rise, so did investor appetite for stocks that traditionally do well as an economy recovers from a recession. Many of those stocks fall into a “value” profile as they were largely ignored for bigger “growth” names in sectors such as technology and communication services.

That change in tenor helped value stocks close what had been a widening gap versus the outperformance of growth stocks over the past several years.

GRAPHIC: Growth vs value performance since March low –

Reuters Graphic

Uncertainty about the medium- or long-term recovery prognosis saw several pivots between stay-at-home and reopening plays.

For instance, the equities market looked beyond grim current conditions and toward an expected recovery in commercial air travel, which can be seen by comparing air traffic data with airline stocks. Investors clearly see the battered sector taking off despite persistently low passenger numbers courtesy of the Transportation Safety Administration (TSA).

GRAPHIC: TSA throughput –

Reuters Graphic

The housing market has been the star of the U.S. economic recovery, rebounding beyond pre-pandemic levels as the hunt for lower population density and home office space, along with historically low mortgage rates, sent demand soaring, home prices surging and supply of homes on the market to all-time lows.

Housing stocks have also handily outperformed the broader market since its nadir. A year later, the Philadelphia SE Housing index is up nearly 150%, almost double the S&P 500’s advance over the same time period.

The sector’s strength is also a reminder of who suffered the worst of the largest economic downturn since the Great Depression, as lower income Americans typically rent and are less likely to be prospective home buyers.

GRAPHIC: Housing market –

Reuters Graphic

Stocks also benefitted from what was referred to as “TINA,” or “there is no alternative” as the Fed’s easy monetary policy kept Treasury bond yields historically low, which also pushed home mortgate rates to their lowest level ever. The yield on the benchmark 10-year U.S. Treasury note was less than the dividend yield for the S&P 500 for some time.

But that has changed in recent weeks as expectations for a rapidly improving economy have also raised inflation concerns, possibly denting the attractiveness of equities should yields continue to rise.

GRAPHIC: S&P dividend yield vs 10-year Treasury –

Reuters Graphic

The quick rise in rates over the past month has also weighed on richly valued growth names, as interest rates could crimp future earnings. That has weighed on the Nasdaq, which includes mega-cap growth names such as Apple and Alphabet and Microsoft.

GRAPHIC: Nasdaq and tech stock performance vs 10-yr –

Reuters Graphic

Exclusive: Catalent to expand production of J&J COVID-19 vaccine in Italy: WSJ

(Reuters) – Catalent Inc plans to expand its COVID-19 vaccine production in Europe that will enable it to make more doses of Johnson & Johnson’s shot, the Wall Street Journal reported here on Tuesday, citing people familiar with the matter.

The contract drug manufacturer will bring online a second J&J vaccine production line at its plant in Anagni, Italy, during the fourth quarter, the Journal reported.

Robinhood buys recruiter Binc to step up hiring

Robinhood said on Monday it would buy recruiting firm Binc for an undisclosed sum, adding more than 80 employees to help the U.S. online brokerage recruit talent.

“The addition of Binc will double the size of our recruiting organization, helping us rapidly scale our team to better serve our customers,” Robinhood said in a statement.

Robinhood has emerged as a gateway for amateur traders challenging Wall Street hedge funds and has seen a meteoric rise in volumes in recent months.

Robinhood said it was actively hiring across its U.S. offices and remote locations.

Biden’s top financial regulatory picks to face scrutiny in Congress

U.S. President Joe Biden’s nominees to head two key financial watchdogs will be questioned by lawmakers on Tuesday on how they plan to tackle racial and income inequality, climate change, fintech regulation, cryptocurrencies, corporate enforcement and other issues.

Gary Gensler, the White House’s nominee to lead the Securities and Exchange Commission (SEC), and Rohit Chopra, nominated to be director of the Consumer Financial Protection Bureau (CFPB), will appear before the Democratic-led Senate Banking Committee.

Progressives see the agencies as key to advancing policy priorities on climate change and social justice and expect the pair, both experienced corporate regulators, to take a tough line on Wall Street. Republicans have criticized Biden for bowing to leftists and have warned that Gensler and Chopra will be divisive if confirmed to the positions.

“These are both going to be key officials setting financial policy for Team Biden. For Gensler, the focus will be on investor protection and how the SEC should respond to GameStop-related market volatility. For Chopra, it will be about his vision for the agency and his enforcement priorities,” said Jaret Seiberg, an analyst at Cowen Washington Research Group.

In prepared remarks posted on Monday, the two nominees vowed to be diligent stewards of the watchdogs without delving into specifics.

As head of the Commodity Futures Trading Commission, Gensler implemented new swaps trading rules created by Congress in 2010 in response to the global financial crisis, developing a reputation as a tough operator willing to stand up to powerful Wall Street interests.

He will join the agency in the wake of January’s social media-fueled trading frenzy in shares of video-game retail firm GameStop Corp and is likely to be grilled on how he will tackle issues raised by the saga. That includes the practice of betting that stocks will fall, or shorting, potential market manipulation on social media, and how retail brokers handle customer orders, analysts said.

Democrats will also likely push Gensler to commit to new corporate disclosures on climate change risks and political spending, and to complete executive compensation curbs. Whether the SEC will take a tougher line on cryptocurrency offerings and investments is also expected to be a focus for lawmakers, analysts said.

WALL STREET-FRIENDLY RULES

Currently a commissioner at the Federal Trade Commission, where he campaigned for tougher consumer privacy and enforcement penalties, Chopra helped establish the CFPB, which was formally launched in 2011.

Democrats will want to know Chopra’s plans for reviving the agency after the Trump administration weakened enforcement and several rules. Republicans are likely to query him on whether the CFPB overstepped its authority in the past.

Chopra will also likely be asked about gaps in minorities’ access to credit, exorbitant lending rates and abusive debt-collection practices, analysts said.

Progressives also want to repeal Wall Street-friendly rules introduced by former President Donald Trump’s regulators and may push Chopra to revisit payday lending and debt-collection rules that they say won’t protect Americans. Gensler may be pressed on reviewing SEC rules governing investment advisers and shareholder voting rights.

“Barring a major meltdown during this hearing, both Gensler and Chopra will be confirmed in the coming weeks and we will begin to see material changes at both the SEC and CFPB,” said Isaac Boltansky, director of policy research at Washington-based Compass Point Research & Trading.

Wall Street set for higher open as bond markets calm – PMIs in focus

European shares jumped on Monday as bond yields stayed below their recent spikes, while risk assets also rallied and Wall Street futures indicated the optimism would continue into the U.S. session.

The rise in European shares followed solid gains in Asian stock markets and saw the STOXX 600 up 1.2% by 1202 GMT. London’s FTSE 100 1.1% higher and Germany’s DAX up 0.7%.

The MSCI world equity index, which tracks shares in 49 countries, rose 0.4%, recovering from the previous session’s multi-week low.

The much-anticipated $1.9 trillion COVID-19 relief bill was passed in the U.S. House of Representatives on Saturday, and now moves to the Senate.

In the bond market, key yields fell from highs seen last week when market participants became wary that when economies re-open from coronavirus lockdowns a combination of massive government stimulus and pent-up consumer demand will cause inflation to accelerate.

The U.S. 10-year treasury yield was down around 3 basis points at 1.429% at 1207 GMT, having dropped from Thursday’s one-year high of 1.614% – although it did edge up slightly overnight.

Germany’s benchmark 10-year Bund yield was down around 5 basis points, also below last week’s spike.

Graphic: Germany 10-year –

Reuters Graphic

“I think more than anything, people were spooked at the speed of the rise, rather than anything else,” said Michael Hewson, chief market analyst at CMC Markets UK.

“The markets are pricing in a (U.S.) rate hike for next year, and a couple in 2023, and that’s what the Fed needs to push back against – and they haven’t done that aggressively enough.”Slideshow ( 2 images )

He said markets were being boosted by expectations that U.S. Federal Reserve officials due to speak in coming days will provide stronger verbal signals against the rise in bond yields.

“There is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields,” wrote Deutsche Bank strategist Jim Reid in a note to clients.

“They simply can’t afford to see it happen with debt so high.”

PENT-UP DEMAND

PMI data for February is also in focus this week. Germany’s factory activity rose to its highest level in more than three years last month, driven by higher demand from China, the United States and Europe.

Manufacturing in Japan grew at its fastest pace in more than two years in February, as strong orders led to the first output rise since the start of the pandemic.

But China’s factory activity grew at a slower pace than in the previous month, missing market expectations, after COVID-19 related disruptions earlier in the year.

Oil prices jumped on Monday, with Brent crude futures and U.S. West Texas Intermediate (WTI) crude futures both up around 1% at 1221 GMT.

Front-month prices for both contracts touched 13-month highs last week. Both contracts ended February 18% higher.

The dollar rose, gaining 0.3% against a basket of currencies by 1222 GMT. The Australian dollar – which is seen as a liquid proxy for risk appetite – recovered some recent losses.

Wall Street looked set for a higher open, with S&P 500 futures up 1.1%. Nasdaq futures were up 1.3% at 1223 GMT, suggesting a recovery for tech stocks.

Bitcoin recovered some recent losses, up 5% at around $47,676 at 1227 GMT.

Also helping sentiment was news that deliveries of the newly approved Johnson & Johnson COVID-19 vaccine should start on Tuesday.

U.S. stocks tank as Treasury yields surge

Wall Street’s main indexes recoiled from record highs on Thursday as surging U.S. Treasury yields took the shine off stocks now that a strong economic recovery looked more certain and investors clung to bets that inflation would rise.

The S&P 500 was down 2.03%, and retreating technology stocks dragged the Nasdaq down more than 3% at one point as the benchmark 10-year note yield surged more than 20 basis points above 1.6% to a one-year high.

That surge put the note yield above the 1.48% S&P 500 dividend yield, wiping out the strong advantage that the stock market has held over bonds during the pandemic.

COMMENTS:

PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL, CHARLOTTESVILLE, VIRGINIA

“It’s an exciting day on the market. Rates matter. We’ve seen the 10-year Treasury yield go from below 1% to 1.5% pretty quickly. At 1.5%, the yield is comparable to S&P 500 dividend yield. And there’s no capital risk with a 10-year, you’ll get your principle back. And all of a sudden it’s competitive with stocks.

“On top of that you’ve had an equity market that’s hit record highs many times this year and it’s expensive relative to historic norms. We were primed for a sell-off and we’re getting one.

“I ignore (the meme stocks), but what they do is point to how speculative in some ways the market is. When you have this small group of stocks acting irrational it puts it in people’s minds that these things can fluctuate up and down and they don’t want any part of it. The meme stocks volatility scares people out of the market in general.

“We’ve had a great market and we have these sell-offs driven by interest rates. You see a lot of corrections in individual stocks because of guidance. Returning to normal is painful for shareholders.”

MICHAEL ANTONELLI, MARKET STRATEGIST, BAIRD, MILWAUKEE

“We had a Treasury auction and the auction result was really sloppy. Rates are having big moves today. The 10-year, the five year yields have been rising throughout the day. The market is really focused on the interest rate world right now, what they’re saying and how fast they’re moving.”

“The auction had a big tail to it … there was not a lot of demand.” he said so as a result “The 10-year yield and the 5-year started spiking around 1 PM EST. People were selling bonds.”

“When yields rise rapidly that scares the stock market.”

“In a low interest rate world a lot of big names and popular stocks do well. When rates rise those kinds of stocks go out of favor.”

“Rising rates is kicking off a rotation from all those hot popular tech names into cyclicals and banks and energy.”

MICHAEL PURVES, CHIEF EXECUTIVE, TALLBACKEN CAPITAL ADVISORS, NEW YORK

“The rate market is getting very dynamic. There have been a lot of rate rises since last August, but this has been the first one that has created a disorderly Treasury sell-off. Given how important Treasuries are to everything, that creates all sort of ripples.”

“The bond market is starting to look like a different landscape. There will be more interest rate hikes in 2023, which is pretty far away but not that far away. When you’ve had zero rates forever, and then those are not quite forever, that’s very disruptive to how markets are wired. But I don’t think it’s a fire alarm.”

“A lot of equities have gone up too much, too fast. Ultimately, there’s rate sensitivity.”

ARNIM HOLZER, MACRO AND DEFENSE CORRELATION STRATEGIST, EAB INVESTMENT GROUP, PHILADELPHIA

“There is a concern that despite the Fed saying they are not going to do anything about interest rates, the level of inflation might get away from the Fed, and that will have a market impact… The Fed’s policy should be a calming message, but because of the amount of supply – Treasury debt – the market is beginning to interpret that as much more stimulus, without potential of a check or discipline. The fear is that excesses could develop in the meantime that twist risk-taking in the market to a place that is overly frothy. The market is trying to get ahead of that by getting conservative.”

“The (yield) curve is telling you that growth is coming back with a vengeance, and if the Fed is not going to do anything about it, then you can speculate with impunity. The institutional crowd has concerns that at some point if we mean-revert, it’s going to be the big-cap names that are a source of liquidity. They’re going to prepare for that.”