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LIVE MARKETS-U.S. stocks dip as momentum stars dim

Tue 29th December, 2020 9:14pm
* Major US indexes close down; small-cap Russell 2000 falls ~1.9% * Real estate, industrials hardest hit S&P sectors * Healthcare, consumer discretionary, only gainers * Dollar falls; spot gold, NYMEX crude rise * US 10-Year Treasury yield ~0.93% Dec 29 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at U.S. STOCKS DIP AS MOMENTUM STARS DIM (1605 EST/2105 GMT) With additional stimulus uncertain, Wall Street's main indexes eased from record highs in volatile trading on Tuesday. .N The S&P 500's .SPX , Dow's .DJI and Nasdaq Composite's .IXIC opening thrusts to fresh record highs quickly faded within the first 5 minutes of regular session trading.*:nL1N2J90MX In the end, changes were modest, nevertheless, the three major averages closed down around 0.2%-0.4%. Of note, recent momentum stars were among early laggards. Weakness in these groups this week, including small caps IWM.P , clean energy PBW.P , and IPOs IPO.P may be denting overall sentiment, and weighing on the market as a whole. The IWM and IPO, with week-to-date (WTD) losses of 2.2% and 5%, are now on track for their biggest weekly drops in 9 weeks. The PBW, with a 6.1% WTD slide, is on pace for its largest weekly decline in 4 weeks. Here is Tuesday's closing snapshot: (Terence Gabriel) ***** LORD ABBETT'S FOUR DEVELOPMENTS TO WATCH IN 2021 (1339 EST/1839 GMT) A team from Lord Abbett is out with a note on the trends that could shape the U.S. equity market in the coming year, and their implications for investors. One trend Lord Abbett sees is an accelerating technology revolution. Amid the global pandemic, Lord Abbett says that companies were able to maintain operations and adapt to the new remote environment through "innovations in cloud technology, artificial intelligence and virtual empowerment." Biotechnology and the COVID-19 vaccine also benefited from the tech revolution through advancements in genomics. While Lord Abbett thinks these trends will continue to support U.S. stocks in 2021, they are also looking to the years that follow, and therefore, they believe investors need exposure to these trends in their portfolios. Another trend is related to how the global pandemic severely affected economically sensitive stocks. Lord Abbett believes cyclical industries such as financials, industrials, and energy could benefit from an "easing in the pandemic crisis in 2021." The search for income in a low-rate world is another development to watch. With government bond yields around the world near all-time lows, Lord Abbett thinks "dividend-paying stocks could garner more attention in the year ahead." Equity valuations are another factor to consider. That said, Lord Abbett believes that investor concerns that valuations have reached the "seemingly excessive levels as they did during the 'dot-com bubble' of two decades ago," are misplaced. In fact, Lord Abbett believes there’s no better place to focus than technology, which was "the epicenter of the collapse in 2000-02." Their view is that while today's tech valuation multiples are modestly higher than the overall S&P 500 .SPX , they are "anywhere between one-half to one-third of what we saw in the late 1990s and early 2000s, depending on the methodology used." (Terence Gabriel) ***** WALL STREET ANALYSTS HAVE THEIR 2021 SECTOR FAVORITES (1158 EST/1658 GMT) Nicholas Colas, Co-Founder of DataTrek Research, is out with a note taking a look at which sectors Wall Street analysts like going into 2021. According to Colas, analysts are more bullish on more sectors, both cyclical and defensive, than a year ago. Colas says that the groups with the highest percentage of buy ratings at present include energy (62%), health care (60%), tech (59%), and communication services (55%). The percent of buy recommendations for the entire S&P 500 is 54%. He notes that one year ago the favored sectors were the same: energy (66%), communication services (60%), health care (59%), and tech (53%). At that time, he adds that no other group was above 50% buys, and the overall S&P 500 had 51% buys. Colas then drilled down to see where Wall Street analysts have grown more bullish from December 2019 (pre-pandemic) to December 2020 (looking forward to post-pandemic). According to Colas, Wall Street has become less optimistic on 2 sectors over the last year: communication services (5 percentage points fewer buys than 2019) and energy (4 points fewer). Additionally, he says analysts are roughly static on 3 sectors vs a year ago: health care (1 point more buys now than 2019), materials (1 point more) and real estate (2 points more). Analysts are notably more positive than a year ago on 6 sectors: tech (6 points more buys), consumer discretionary (5 points more buys), utilities (9 points more buys), industrials (4 points more buys), financials (5 points more buys), and staples (8 points more buys). Colas' main take away is that the "groups where Wall Street analysts have more buys than a year ago are a strange hodgepodge of defensives (utilities, staples), market leaders (tech) and cyclicals (consumer discretionary, industrials, financials)." He adds that "We doubt all can work but we do continue to like industrials for their earnings leverage to a global economic recovery." (Terence Gabriel) ***** WALL STREET'S INITIAL GAINS FADE AS MOMENTUM STARS STUMBLE (1029 EST/1529 GMT) The major U.S. indexes have seen opening thrusts higher fade. This as some of the market's recent momentum stars are suddenly stumbling. .N The Dow .DJI , and S&P 500 .SPX are clinging to slight gains, while the Nasdaq Composite .IXIC , after initially popping about 0.6% shortly after the open, is now around 0.2% in the red. Meanwhile, the small-cap Russell 2000 .RUT , which may have been on its tip toes*:nL1N2J811Y, is sharply underperforming with a loss of around 1.6% on Tuesday. Indeed, the RUT, which is on pace to end an 8-week winning streak, is also on track, with a loss of around 2%, for its biggest weekly decline in 2 months.*:nL1N2J4146 Another recent momentum star is also taking a hit. The WilderHIll Clean Energy Index .ECO is down more than 3.5% Tuesday. And with a more than 6% slide is on track for its biggest weekly decline since early December.*:nL1N2IO23X Here is your early trade snapshot: (Terence Gabriel) ***** NASDAQ 100 FUTURES: WATCH YOUR HEAD (0855 EST/1355 GMT) CME e-mini Nasdaq 100 Futures NQcv1 are once again bumping up against a ceiling in the form of a log-scale channel resistance line. It now remains to be seen if they have the fortitude to breakout to another level, or if they are about to be knocked for a loop. (Click on chart below) Indeed, with Tuesday's overnight high of 12,898.75, the futures essentially tagged a channel parallel derived from the support line off the late-September low. That resistance now resides around 13,000.*:nL1N2J314H Meanwhile, daily momentum is lagging. Although the RSI is rising, it remains well below its early-December peak. In the event the futures retreat, it can solidify a bearish divergence. A break of the rising support line from the early November trough, now around 12,625, and then the December 21 low (12,461) can suggest the futures may have a ways to fall given that the support line from late-September is now around 11,375. If the futures can close above the channel line, it can potentially spark a quick thrust to the next resistance, at a shorter-term rising channel line, now around 12,225. That said, such a move could once again lead to the kind of severely overbought RSI that accompanied the early-September top. (Terence Gabriel) ***** SOME CAUTIOUS COMMENTS ON BREXIT (1250 GMT) While financial markets are relieved and cheering a Brexit deal that averted a chaotic exit from the European Union, some analysts sound cautious on the positive impact of the agreement. "At this stage we do not recommend adding risk and prefer to keep a neutral stance on cheaply-valued UK assets," Lyxor Asset Management’s head of market research, Jeanne Asseraf-Britton says, adding the fund closed tactical long on GBP/USD a few days before the deal. "Non-tariff barriers to trade, at a time when Covid-19 related restrictions have caused significant border delays, could shave up to 1% off UK activity," she adds. But the door is open "for further (much needed) negotiations". Economists underline that the deal does not cover financial services, which means there is no mutual recognition of qualifications that will have to be settled by professional organizations, an issue which could be challenging. "On this note, much will depend on the generosity of the EU in terms of the final equivalence deal that is offered,” a Nomura research note says, adding it remains to be seen how this will affect the City of London as a financial centre. UBS analysts are more positive and confirmed a target of 7,200 points for the FTSE 100 index by end-2021. (Stefano Rebaudo) ***** HOW 2021 CAN HURT RISK-APPETITE (1123 GMT) Everybody knows what the magic words for 2021 are: vaccines and (fiscal and monetary) stimulus. While there is broad consensus that next year the economy will grow along with risk appetite, if something goes wrong with them, we'll have to change our perspective quickly. Let's play devil's advocate. The vaccine could be less effective than expected, or part of the population might be reluctant to take it. If something like that happens, “the recovery could retain its uneven ‘K-shape’”, which means investors should focus on “U.S. tech and the equities of those countries that are best able to control or reduce infection rates,” research provider TS Lombard says in its 2021 outlook. The 2020 deterioration in public finances has caused a degree of alarm among politicians, who might switch back to austerity too soon. Most importantly they should understand that "low interest rates cannot offset the deflationary impact of tight fiscal policy,” it adds. There is more confidence on central bankers who will do everything they can to support the economy, keeping their policy rates at zero level as long as it takes. But equity valuations are high and therefore very sensitive to rising yields, which means they can collapse in a rising- rates scenario. Central banks are expected to step in to correct any tightening of financial conditions, but if inflation should emerge their policy might change and become more restrictive. (Stefano Rebaudo) ***** NOW UK STOCKS ARE THE MOST LOVED (1058 GMT) UK equities are back in fashion after being the most battered for years, as a deal on Brexit was struck last week. But let's see some numbers. UBS confirms its target of 7,200 for the FTSE 100 index by end-2021, which is based on 32% EPS growth expected for 2021 and 10% in 2022, combined with a fair value PE multiple of 16 times. That represents an over 8% upside from current levels. The UK is one of UBS' favoured global equity markets, "particularly from an unhedged perspective as we suspect a large proportion of the return for international investors will come from the strengthening currency," it says in a research note. UBS forex strategists expect sterling to stand at $1.44 by end-2021. UK equities have been one of the worst performers since the Brexit referendum in 2016, leaving valuations for UK stocks relative to Europe at "close to 20-year lows.” As you can see in this chart, the FTSE 100 relative to World stocks trades at 25% discount (on a PE basis), the highest in nearly 26 years. (Stefano Rebaudo and Danilo Masoni) ***** STOXX TOPS 400, LONDON SHINES, DAX AT NEW RECORD (0858 GMT) It's clearly risk-on this morning with European shares off to a strong start and London stocks taking the lead in the region on their first day of trading after a last minute EU-UK trade deal was officially finalised last week. Of course the cheer from the big U.S. stimulus package is also in play, giving investors another reason to remain in a festive mood. The pan-regional STOXX 600 .STOXX index has climbed above 400 points for the first time in ten months, while the UK's top share FTSE 100 .FTSE index is up 1.7%, set for its biggest one-day gain in nearly one month. UK mid caps .FTMC are also doing nicely, up 1.2%. Meantime in the euro zone, Germany's DAX .GDAXI is up just 0.6% but has hit a new record high for the second day in row, helped by relief over Brexit and the U.S fiscal boost. Here's your snapshot: (Danilo Masoni) ***** STIMULUS CHEQUES MAKE IT A SEASON TO BE A JOLLY (0814 GMT) It looks like Americans could be getting $2000 per head stimulus cheques rather than the originally approved $600 -- if the U.S. Senate plays ball -- and the House of Representatives has swept past Donald Trump's veto of a defence policy bill. The prospect of bigger stimulus payments sent Wall Street to a record high on Monday, while today Japanese shares have scaled a 30-year top and European equity futures are pointing north. Energy and copper prices also reflect that optimism. Brexit is out of the way too, though the thorny issue of financial services is up in the air and sterling is strangely subdued around $1.35. CFTC data showed sterling long positions grew in the week to Dec 21 ahead of the trade deal -- the next set of data will reveal whether speculators "sold the fact". The data showed also that dollar short positions remain in vogue, touching three-month highs. The greenback is at 2-1/2 year lows against a basket of currencies as optimism grows about the economic recovery outside the United States. Markets are shrugging off the Trump administration's move to strengthen an order barring U.S. investors from buying securities of alleged Chinese military-controlled firms. Chinese shares closed weaker however. Key developments that should provide more direction to markets on Tuesday: - Jack Ma's Ant Group may fold its financial operations into a holding company that could be regulated more like a bank, Bloomberg News reported. That comes after China asked ANT to shake up its lending and other consumer finance operations. -Britain must vaccinate two million people a week to avoid a third wave of the coronavirus outbreak, a study by the London School of Hygiene and Tropical Medicine says - China's factory activity likely maintained a solid pace of expansion in December, a Reuters poll showed, ahead of Thursday's PMI data. (Sujata Rao) ***** <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ open FTSE 100 PE discount to MSCI World NQcv112292020 Earlytrade12292020 closer12292020 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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