Today on Wall Street: We’re not done with cyclicals yet

06/18/2021 | 09:20am

Wall Street had a turbulent session yesterday, after the Fed announced the start a new phase of its monetary policy. Investors returned to their beloved technology stocks, but the movements seen yesterday may not indicate a shift and should still be viewed with caution.

It looks like financial markets took rather well the confirmation by the US central bank that a phase of monetary normalization is coming. It was, after all, expected. But the timetable is now a bit more concrete and a bit tighter than anticipated.

On Wall Street, there was a nearly 2% gap between the 1.29% rise in the Nasdaq 100 and the 0.62% drop in the Dow Jones at the bell. The Fed's announcements brought back technology stocks, including large caps, semiconductors, and even stocks that were just recently considered overpriced. On the other hand, profit taking took place in the star sectors of the beginning of the year, in particular in banking and oil stocks. The reversal was quite spectacular compared to the previous day's session. Enough, in any case, for the scenarios of the end of the domination of "cyclical" and "value" strategies over "growth" strategies to come back to the forefront. Investing in growth stocks has been incomparably more efficient than any other strategy since the 2008 financial crisis, except for the last few months during which discounted stocks with a high correlation to economic growth have, logically enough, performed better.

The combination of the Fed's announcements and a sharp correction in the prices of several commodities is probably making investors question their allocations. The significant gains in energy stocks (up 40% in the United States since January 1) and financial stocks (up 28% over the same period) have led to legitimate profit taking. At this stage, the fall in the prices of certain basic materials is more related to a reduction in the speculative premium than to a fall in demand.

Drawing definitive conclusions based on a single trading session is probably a bad idea. Economic activity is strong, albeit spurred by government funding, and the supply/demand ratio is still in very favorable territory. The reopening of the last remaining constrained parts of the economy will provide a mechanical acceleration effect. The strategy of normalization that will allow central banks to gradually leave the stage is being implemented, even if everyone has understood that they will not disappear from the scene for a while. Let's not bury cyclical stocks too soon… 

 

Economic highlights of the day:

British retail sales and German producer prices for May are accompanied by quarterly wage data in France. No indicators are expected from the US.

The dollar remains at its best level in two months against the euro, at EUR 0.8398. Gold is up slightly to USD 1793 per ounce. Oil is losing altitude, with Brent at USD 72.49 and WTI at USD 70.57. The yield on US debt has eased to 1.51% over 10 years. Bitcoin is trading just below USD 38,000.

 

On markets:

* Adobe was up 2.7% in after-hours trading Thursday after the company reported quarterly results and a revenue forecast for the current quarter that was above the Refinitiv consensus. At least six analysts raised their price targets.

* Chevron and Occidental Petroleum announced Thursday that they have evacuated personnel from their Gulf of Mexico facilities as a tropical storm approaches.

* EBay and Norwegian group Adevinta have obtained the last official approvals necessary for the combination of their classifieds activities, Adevinta announced Friday. eBay must receive in payment 2.5 billion dollars in cash and 540 million shares of Norwegian, valuing its activities. The eBay share gained 1% in pre-trade.

* Amazon's cloud computing division, Amazon Web Services (AWS), signed an agreement with FERRARI to provide its services in artificial intelligence, machine learning and the cloud.

* Sykes Enterprises, which specializes in IT services, announced Friday that it was acquired by Sitel Group in a deal valued at about $2.2 billion (€1.8 billion) on a fully diluted basis.

 

Analyst recommendations:

  • American Express : DZ Bank downgrades stock to hold from buy, $170 price target
  • Continental Resources : Northland Securities raises pt to $32 from $20, maintains market perform rating
  • CyrusOne : Jefferies adjusts price target to $83 from $84, keeps buy rating
  • Devon Energy : Northland Securities raises pt to $34 from $30, maintains outperform rating
  • Diageo: J.P. Morgan upgraded from Underweight to Neutral with a target of GBP 3500.
  • EasyJet: HSBC upgraded from Hold to Buy with a target of GBP 1200.
  • Enbridge Upgraded to Outperform at Credit Suisse
  • HSBC: J.P. Morgan upgrades from Underweight to Neutral with a target of GBP 440.
  • Hyatt Hotels : Goldman Sachs adjusts price target to $105 from $93, maintains buy rating
  • Marathon Oil : Northland Securities adjusts pt to $10 from $8.60, maintains market perform rating
  • Microsoft : President Capital initiates coverage with neutral rating, $270 price target
  • Progressive : BofA Securities lowers pt to $123 from $127, maintains buy rating
  • Rotork: Morgan Stanley upgraded to Overweight from Overweight on GBp 390.
  • Ryanair: HSBC upgraded from Hold to Buy, targeting EUR 19.
  • Talos Energy : Northland Securities adjusts pt to $22 from $21, maintains outperform rating
  • Tenet Healthcare : Raymond James changes price target to $90 from $85, maintains outperform rating
  • Viavi : WestPark Capital upgrades to buy from hold, adjusts pt to $22 from $18
  • Vodafone: Goldman Sachs maintains its Buy rating on the stock. The target price is unchanged and still at GBp 180.
  • Wizz Air: HSBC upgrades from Light to Hold with a target of GBp 4500.
Romain Fournier
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