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LIVE MARKETS-Look beyond big U.S. tech stocks - RBA says

Wed 21st October, 2020 5:53pm
* Major U.S. stock indexes gyrate; now back in the red * Energy, cons disc weakest major S&P sectors; comm svcs leads gainers * U.S. House Speaker Pelosi says there is prospect for a COVID-19 aid deal * Dollar, crude fall; gold up; U.S. 10-yr T-Nt yield ~0.81% Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at LOOK BEYOND BIG U.S. TECH STOCKS - RBA SAYS (1241 EDT/1641 GMT) There are plenty of opportunities for investing outside of the big U.S. tech-related names, and investors should look in particular at small-cap stocks in developed markets outside of the United States, Richard Bernstein, chief executive of asset management firm Richard Bernstein Advisors, said in a conference call late Tuesday. "It's such a shame that the fab five tech stocks have dominated everybody's view and made us all terribly myopic about what's working and what's not working around the world," he said while giving the firm's quarterly market update. "Do not say there is no place to invest outside of the United States. There are plenty of opportunities," he said. "The fact that small caps outside the United States are outperforming large caps is an interesting development... We've had positions for quite some time now in developed markets small-cap stocks... We think these companies have improving fundamentals and valuations that are dirt, dirt cheap. And absolutely no one cares," he said. Leadership in the U.S. market has become "more and more narrow," Bernstein said, referring to the popularity of tech names. "Is it 2000 all over again? It's not 2000, but it's pretty close," he said. When the cycle turns, leadership broadens out, he said, and "If you are the least bit optimistic about the future of the economy and profits, you have to think broader than the fab five." (Caroline Valetkevitch) ***** NARROWING PRESIDENTIAL ELECTION ODDS PRESSURE RISK MARKETS (1227 EDT/1627 GMT) The increasing odds for a Biden victory in the looming presidential election helped support the markets in the first two weeks of October, the recent narrowing of those odds is likely to have the opposite effect, according to a research note from JPMorgan. The shrinking probability of a definitive electoral victory increases the likelihood of contested results and a split Congress "would reduce fiscal stimulus expectations and likely put some downward pressure on risk markets over the near term," the note reads. Such a scenario would have "more implications for the so-called value trade, i.e. a steepening of the UST curve and a prospective shift towards traditional cyclical stocks such as banks" JPM says, adding that "this value rotation depends on fiscal stimulus, and thus lack of fiscal stimulus would hinder it." This view is supported by October index performance. According to Real Clear Politics' Presidential election results betting odds from Sept. 30 through Oct. 12, the probability of a Biden win increased. During that period, the S&P 500 advanced 5.1%, while the S&P Banking index .SPXBK gained 8.1%. Since then, however, the S&P has dropped 2.6% and the SPXBK has shed 4%, as of Tuesday's close. Below is a screenshot of Real Clear Politics' Presidential Betting Odds since mid-March. The latest data shows Biden recovering some ground. (Stephen Culp) ***** EUROPE JUST COULDN'T KEEP UP (1210 EDT/1610 GMT) It's quite rare for European stocks to diverge so much from Wall Street and today's session was a particularly peculiar one as it's difficult to put the finger on why. After making timid gains at the open, the pan-European STOXX 600 .STOXX gradually sank deep into the red and closed down 1.3% while in New York, the Dow .DJI , the S&P .SPX and the Nasdaq .IXIC are about flat. It's quite hard to imagine that European investors would be more affected or taking a different view on how the U.S. stimulus talks will pan out . So what's cooking? Seems it's some sort of toxic cocktail. "The fall is due to a mixed set of Q3 earnings, a rising euro, the steepening of the yield curve, hedging demand rising and fading hopes that a vaccine will soon be available, not to forget Brexit news, which is boosting the pound but weighing on the FTSE", said Stephane Ekolo, an equity strategist at TFS Derivatives in London. Other analysts also blamed the resurgent pandemic in Europe as being the main drag. "Traders on this side of the Atlantic are worried about the tougher restrictions brought on by the pandemic", wrote CMC Markets analyst David Madden in his closing note. Joshua Mahony at IG, also blamed the COVID-19 situation. "The ongoing tightening in restrictions on movement in Europe provides little reason for optimism as things stand, with nationwide lockdowns in Ireland and Wales likely to pave the way for similarly drastic action elsewhere", he also wrote to his clients. Not that it affected trading, as the news hit our wire after the close but a total of 26,688 coronavirus cases were reported in Britain on Wednesday, the highest daily total to date... (Julien Ponthus) ***** SEARCHING FOR YIELD IN A LOW-RATE WORLD (1047 EDT/1447 GMT) The 10-year US Treasury yield US10YT=RR has probed to its highest level since early June. That said, LPL Financial is noting that the yield is still near historical lows set earlier this year. According to LPL, historically, 10-year Treasury performance over a 10 year period has tended to track the Treasury yield at the start of the period. By this measure, the return outlook for the 10-year Treasury is "just about as low as it’s ever been." In fact, right now the 10-year Treasury yield is not even enough to compensate for inflation, a very unusual relationship historically, but more common in recent years due to low interest rates. "All else being equal, a 10-year Treasury yield of about 0.75% points to an expected annualized return of about 0.75% over the next 10 years, likely lower if rates rise,” said LPL Financial Chief Market Strategist Ryan Detrick. “But getting anything more than that from a bond allocation means taking on more risk, which may put more conservative investors in a tough position.” So what are bond investors to do? LPL believes that for the most conservative investors, Treasuries, which have no real default risk, are "still a very safe choice," even though they can experience losses when rates rise. If taking on more risk is an option, LPL thinks carrying "only modest Treasury exposure in a bond portfolio with diversification to corporate bonds and mortgage-backed securities (MBS)" may beef up return potential. LPL says that ultimately, stocks have the best return prospects, but also carry much higher risk. Therefore, even with their lower return potential, "quality bonds may still act as a portfolio diversifier while likely offering potential gains in the long run, even if at lower levels than what we’ve seen in the past." (Terence Gabriel) ***** MORTGAGE DEMAND DIPS AS RATES BOUNCE OFF RECORD LOWS (1002 EDT/1402 GMT) Demand for home loans edged 0.6% lower last week, according to the Mortgage Bankers Association (MBA). The average 30-year fixed contract rate USMG=ECI edged up from an all-time low, rising 2 basis points to 3.02%, prompting a 2% drop in applications to purchase homes USMGPI=ECI that more than offset an uptick in refi demand USMGR=ECI . A swath of housing market indicators have roared past pre-COVID levels to heights not seen since the housing bubble. And some don't believe those levels will be sustainable. "We look for another gain in existing home sales in September to a SAAR (seasonally-adjusted annualized rate) of 6.25 million to be reported tomorrow," writes Nancy Vanden Houten, lead economist at Oxford Economics. "But the mortgage purchase application data suggest the pace won't be sustained in the fourth quarter." Low rates and a widespread shift to the work-from-home model have stoked demand, even as tight supply and rising materials costs have pressured affordability. The National Association of Realtors is due to release its existing home sales data for September tomorrow, and analysts see a 5% jump to 6.3 million units SAAR. This, on top of August's SAAR 6.0 million units, which was the highest level in nearly 14 years.*:nL2N2GJ0R8 Investors are in a buying mood in early trading, with the major indexes building on Tuesday's gains. All eyes are on Washington, anticipating news of stimulus negotiations. (Stephen Culp) ***** S&P 500: GIVEN FROTH, MAY STILL FACE A WORSE SPILL (0915 EDT/1315 GMT) Early last week, the S&P 500 index .SPX ended just a little more than 1% below its record high.*:nL1N2HA0US With this, a contrarian measure of sentiment, based on the CBOE equity put/call (P/C) ratio, was once again flagging an overly bullish, or especially complacent market, vulnerable to a reversal. The SPX has since pulled back. (Click on chart below) Indeed, the 5-day moving average (DMA) of the P/C ratio was well below a sub-0.6 reading. Since late 2018, such readings have coincided with significant S&P 500 highs. More recently, in early June, after this measure fell to a two-decade low at 0.402, the SPX promptly slid more than 8% in just five trading days (tds). And after its late-August low at 0.406, the SPX collapsed nearly 10% in just 14 tds. That said, on the plus side, the SPX had been rallying off its late September lows, which occurred just after an important turn date.*:nL1N2GD0LW However, market internals that were showing strength now appear to have topped, or are stalling.*:nL1N2H61AG Although what may be a more robust bearish signal when the P/C measure makes a higher-low against a higher-SPX-closing high has yet to form over the very short-term*:nL1N2FY0Y5, the fact that the S&P 500 just missed making a new high by only around 1% may be good enough. The index is, of course, well above its June levels when the P/C measure hit a multi-decade low. As it stands, the P/C measure, after bottoming at 0.41 on October 13, is now rising. A thrust back over 0.6 may coincide with greater SPX instability. This just as Nasdaq 100 volatility .VXN is threatening to vault.*:nL1N2HB0NE (Terence Gabriel) ***** FOR WEDNESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT CLICK HERE:*:nL8N2HC50J <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ PC10212020 MBA Existing home sales Real Clear Politics odds ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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