Mega-cap Tech moving into Value Cyclicals and Rising Tension with China Contribute to Market Step Back
Markets took a half a step back last week as the rotation out of mega-cap technology into value cyclicals continued. Progress was made in the EU and the US on additional stimulus packages, while tensions between the US and China continued to intensify. Economic data was mixed for the week with initial claims showing more signs of weakness. The S&P 500 fell 0.28%, the Dow lost 0.76%, the Russell 2000 shed 0.39%, and the tech-heavy NASDAQ lagged, losing 1.33%. The US Yield curve flattened as the 2-year note yield remained unchanged at 0.14%, and the 10-year bond yield decreased by four basis points to close at 0.58%. Gold surged to an all-time high of 1897.50 per OZ, up ~$87 for the week. Oil traded fractionally higher with WTI closing at $41.08 a barrel. There were no changes to our models during the week.
2nd quarter earnings continued to roll out with better than expected results coming from stalwarts Microsoft and Tesla. However, both names sold off after their earnings announcement, which may suggest that their recent price outperformance had already priced in better earnings. Intel did not help matters in the Tech sector after it reported disappointing earnings and delayed its next-generation chip. Rotation out of tech put a bid into energy, consumer discretionary stocks, and financials- a trend that we have been talking about over the last several weeks.
Across the pond, the EU announced another tranche of stimulus. The 750 billion euro package is considered to be quite the compromise and still has quite a few variables to resolve. In the end, the north and south continue to be very far apart on how the EU's finances should be handled, and both sides are wary of many of its Eastern European member's populist agendas. The GOP Coronavirus Relief bill also found some footing, although the announcement of the final details was pushed into the coming week.
Mounting tensions between the worlds to biggest economies were very much on investor's minds throughout the week. The US forced the closure of the Chinese embassy in Houston in a move aimed at warning Beijing on spying on and theft of US intellectual property. Most recently, the FBI announced it was looking for two Chinese nationals that are accused of hacking into US pharmaceutical company data related to COVID-19 vaccine efforts. In response, the Chinese announced the closure of the US embassy in Chengdu.
Economic data continued to show mixed results. Existing home sales beat expectations coming in at 4.72 million versus the consensus of 4.32 million. New home sales were also better coming in at 776k versus 700k. Initial claims posted its 18th week of claims over 1 million and came in last week worse than expected at 1.416 million. Continuing claims fell to 16.19 million down from the prior reading of 17.30 million.
