Morning Bid: Small caps soar in catch-up rotation, Trump jars Taiwan
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[July 17, 2024] A
look at the day ahead in U.S. and global markets from Mike Dolan
The dramatic switch to U.S. small cap stocks over the past week went
into overdrive on Tuesday as interest rate cut and election fever
combine, but world markets more broadly are getting nervy of the
prospect of Donald Trump's return to the White House.
In a series of interviews around this week's Republican convention,
Trump set out several of his policy priorities around tax cuts, tariff
rises and foreign policy.
The most jarring comment overnight was his assertion that Taiwan should
pay for its own defence - which knocked Taipei's benchmark index down
about 1% - but it's just one of series of policy directions that's
starting to feed market pricing.
Taiwan's chipmaking giant TSMC plunged 3%, the wider Taipei benchmark
was down about 1% and chip stocks elsewhere were knocked back. Gold
prices rose.
Caught in the slipstream of this chipmaker hit and the week's Wall St
rotation, global megacaps such as Nvidia are set to fall for the third
day.
It's a different picture for small caps however.
The Russell 2000 of soared 3.5% on Tuesday - its fifth straight day of
gains greater than 1%, its longest winning streak since April 2000 and
highest level since January 2022.
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Jumping more than 10% over the past week, the index of mostly
domestic-facing smaller business is now up almost 12% for the year to
date - narrowing the gap with the S&P500's 19% for 2024 so far and the
21% rise in the Nasdaq 100.
Adjusting for the outsized weightings of the megacaps, the
equal-weighted S&P500 is now up almost 9% for the year.
And futures suggest the Russell will hold those gains later.
The gist of the argument behind the shift to better valued small caps
from the pricy tech bellwethers is both stepped up interest rate cut
speculation but also the tax, tariff and reshoring lean of a possible
Trump return - now that his lead in betting markets for a November win
has surged to more than 70%.
That home bias has been absorbed pretty well across the board by the big
stock indexes so far, with the S&P500 also up marginally to new highs on
Tuesday.
VOLATILITY CREEPING BACK
But there are growing signs of volatility and disruption creeping back
in - with S&P500 futures down almost 1% ahead of the Wednesday's bell
and Nasdaq futures off 1.3%.
The VIX volatility gauge was at its highest in more than a month.
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A trader works on the floor at the New York Stock Exchange (NYSE) in
New York City, U.S., March 7, 2024. REUTERS/Brendan McDermid/File
Photo
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The economic backdrop to the stock market churn seems less worrying.
Resuming U.S. disinflation still has futures fully pricing a first
Fed rate cut in September and 65 basis points of rate cuts by
year-end. Canada's surprisingly soft June inflation update
reinforced that view.
The June U.S. retail sales readout was better than expected and the
Atlanta Fed's 'GDPNow' real time growth monitor nudged up to 2.5%
this week from 2% last week.
U.S. industrial production numbers and housing starts top the diary
later and the earnings season starts to broaden out beyond the big
banks.
Overseas, UK headline inflation came in on target at 2% - though
that was slightly above the 1.9% forecast and services inflation
also picked up steam.
Sterling rose as money markets dialed back the chances of a Bank of
England rate cut next month to as little as a one-in-four chance.
Britain's new Prime Minister Keir Starmer will set out his first
package of proposed laws on Wednesday, fleshing out how he will
honour his election-winning pledge to rebuild the country after
years of weak economic growth and political turmoil.
Key developments that should provide more direction to U.S. markets
later on Wednesday:
* U.S. June industrial production, June housing starts
* US corporate earnings: Johnson & Johnson, Northern Trust, US
Bancorp, Citizens Financial, Discover Financial, Synchrony
Financial, United Airlines, Steel Dynamics, Prologis, Kinder Morgan,
Crown Castle, Equifax, Elevance Health
* Federal Reserve releases Beige Book of economic conditions; Fed
Board Governor Christopher Waller, Richmond Fed President Thomas
Barkin and Kansas City Fed chief Jeffrey Schmid all speak
* New UK government sets out its legislative plans for the coming
parliament in so-called King's Speech
* German Finance Minister Christian Lindner holds news conference on
2025 draft budget
* US Treasury auctions $13 billion of 20-year bonds
(Editing by Bernadette Baum)
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