One look at S&P futures this morning reveals an unchanged market, however it is again the violent sector rotation that is taking place behind the scenes that is the real story, with defensive sectors real estate, retail, food, utilities outperforming while investors continue to bail and book profits on tech stocks after sharp gains since the start of the year. Monday’s Nasdaq rout also spread to European and Asian markets which fall on last-minute changes to the tax plan, most notably the retaining of AMT which could prevent companies from making use of intellectual property tax breaks, effectively raising their tax rates. As a reminder, on Monday the Nasdaq fell 1.2% following broad-based hedge fund liquidation from the most crowded sector, after tax experts said Senate Republicans unwittingly passed a bill that would mean higher-than-intended taxes for prevent companies from making use of intellectual property tax breaks; in sympathy Europe’s Stoxx tech sector index SX8P hit the lowest since late September, down 8% since mid-November
European stocks dipped, trimming the previous session’s sharp gains amid a renewed selloff in tech stocks globally and as weaker industrial metal prices weighed on mining shares which slumped “due to a marked slowdown in China’s metal consumption growth, with market participants foreseeing weaker public infrastructure spending growth extending into 2018,” SP Angel analysts including John Meyer, Simon Beardsmore, and Sergey Raevskiy write in note.
The Stoxx 600 is down 0.2%, remaining in a range between its 50-DMA and 200-DMA started in mid-November. The Stoxx tech sector SX8P index falls 0.6%, mirroring a drop in the Nasdaq Monday. As noted above, Europe’s tech sector is down about 8% since a peak in early November, amid a sharp sector rotation out of momentum stocks and into potential winners of the U.S. tax reform. UK’s FTSE 100 outperforms peers amid the weaker pound which had briefly tripped through 1.34 as Brexit talks had been unraveled over disagreements from the DUP in regards to a hard border between Ireland and Northern Ireland. UK grocery retailers are among the top movers in the FTSE 100 after a positive note from Goldman Sachs. Elsewhere, to the downside, healthcare and material names lag.
Another sharp drop in UK car buying also dampened the mood though analysts said the pound’s drop might only be temporary. “The immediate fallout should be limited as markets have become well versed with the idea that Brexit won’t be solved overnight,” said ING. “We remain constructive on GBP.”
Earlier, benchmark indexes fluctuated in Tokyo, while shares in Hong Kong and Shanghai fell even as a report showed China’s service sector expanded more firmly last month than in October. ASX 200 (-0.2%) and Nikkei 225 (-0.4%) were negative as tech names tracked the weakness of their US counterparts. Hang Seng (-1.0%) was also subdued by tech woes, while Shanghai Comp (-0.2%) traded indecisive after encouraging Caixin Services and Composite PMIs were counterbalanced by continued PBoC inaction, which resulted to net daily drain of CNY 170bln. Finally, 10yr JGBs were lackluster with demand sapped amid a 10yr auction, which showed weaker demand and lower accepted prices than prior.
In macro, sterling continued to weaken, at one point triggering stops below 1.34, as Brexit talks continued to resolve the Irish border question and retail sales and services data disappointed.
The euro pared losses as indicators showed economic momentum accelerated to its fastest pace in over six years in November. The early blitz of European data included the best Spanish industrial production numbers in 14 months a rebound in Italy’s services sector, a private sector jump in Sweden and signs of a hiring boom in France. Most European government bonds rose, with Greek bonds outperforming after progress on the country’s bailout.
The Australian dollar strengthens to a three-week high on stronger-than-expected retail sales data and after the central bank signaled inflation is set to quicken. Overnight, the RBA kept the Cash Rate at a record low 1.50% as expected and reiterated it judged steady policy is consistent with growth and inflation targets, and while noting that wage growth remains weak, the RBA said that “some employers are finding it more difficult to hire workers with the
necessary skills”. Furthermore, the central bank repeated that rising AUD would slow economy and inflation, while it also commented that forecast remains for inflation to increase gradually and that the outlook for non-mining business investment further improved. RBNZ Acting Governor Spencer said should be cautious on making any recommendations for changes to current policy framework and that there remains broad confidence in effectiveness of current framework. Spencer also commented that weak global inflation is assumed to persist in line with the forecasts of the international institutions, which now puts some risk on the upside for inflation
and interest rates.
Going back to the tax bill and the reason behind the tech rout, Bloomberg explained that as amended, the Senate tax bill would preserve the existing 20 percent corporate alternative minimum tax, a levy designed to stymie companies’ tax avoidance that applies to fewer than 1 percent of U.S. companies under current law. But under the Senate plan, retaining the AMT could prevent companies from making use of planned tax breaks related to intellectual property, to spending on new equipment and to research and development. The AMT may fall hardest on technology and utilities companies — though the snag would apply broadly, experts say. “The fact is, almost everyone who’s a corporate taxpayer is going to be an AMT taxpayer” under the bill, said Bret Wells, a tax law professor at the University of Houston.
In the U.S., House and Senate lawmakers are now poised to begin working on compromise tax-overhaul legislation — a key step in their drive to send a bill with tax cuts for corporations and individuals to President Donald Trump by the end of the year. A global stock rally that has led indexes to record highs has stalled so far this month as investors lock in profits in tech stocks, the year’s best performers, and switch to firms seen benefiting most from a potential reduction in the corporate tax rate such as banks.
“It’s been noticeable that there has been a distinct sector rotation over the last week which is impacting the momentum of the market,” Jim Reid, global head of credit strategy at Deutsche Bank AG in London, wrote in a note to clients.
