Last checked at 
* Major averages lower, Nasdaq down >1%; small caps
underperform
* Cons disc, tech weakest sectors; real estate sole gainer
* Dollar, gold dip; crude edges up
* U.S. 10-Year Treasury yield ~1.6%
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markets.research@thomsonreuters.com
POSITIONING FOR INFLATION'S TEMPORARY STAY (1347 EDT/1747
GMT)
Saira Malik, CIO, head of global equities at Nuveen, is out
with some comments on inflation's arrival and how best to
position, for what may be its temporary stay.
According to Malik, U.S. annual inflation readings have
ticked higher, thanks largely to comparisons with last year’s
recessionary environment.
Monthly inflation has also climbed, primarily as a result of
a rise in energy prices. Indeed, she notes gasoline prices rose
9.1% in March alone.
According to Malik, the year-over-year comparison effect,
and especially when it comes to energy components, will likely
be even more pronounced with April’s reports, "which will almost
certainly push headline inflation above 3% and core inflation
above 2%."
That said, Malik believes this will "almost certainly be
transitory". However, she does think that on a monthly basis,
inflation data could remain elevated given that large and small
business surveys indicate that pricing pressures are a concern.
In any event, Malik says that while half of March’s
inflation is attributed to gasoline, the other half can be
traced to service industries including hotel stays, sporting
event admission, car insurance and public transportation, which
have all seen cost increases above historical averages. However,
these prices are still below their pre-pandemic peaks.
Malik's bottom line is that we are in a reflationary
environment as demand slowly normalizes, rather than in one of
exploding inflation. She therefore expects inflation to recede,
possibly by the start of the fourth quarter.
In this environment, she prefers areas of the market that
are strongly levered to the economy and interest rates, such as
financials, industrials and consumer services.
She would avoid companies that have already priced in a
recovery or that lack quality fundamentals.
(Terence Gabriel)
*****
MOVE TO QUALITY WITH THE CYCLE SHIFT (1316 EDT/1716 GMT)
As much has been made of the performance of value and
cyclical names over the past few months, Morgan Stanley's chief
U.S. equity strategist Michael Wilson believes evidence is
mounting to be more selective.
While Wilson acknowledges recent economic data "has been
nothing short of spectacular" he also notes that it was not that
much of a surprise to markets, and many data points are also
likely peaking from a rate of change standpoint.
Wilson believes this economic recovery is happening about
twice as fast as the prior three recession and recovery cycles
and as such, the economy is shifting from early cycle to
mid-cycle.
Higher quality names have started to outperform in recent
weeks, and investors have started to favor larger cap stocks,
while the performance of cyclicals to defensives seems to have
peaked, according to Wilson.
The significant deterioration in breadth also signals to
Wilson the market is preparing for "what is likely to be a more
difficult environment for stocks and risk assets generally."
Rising cost pressures, supply shortages, the peak rate of
change on earnings revisions and demand being overwhelmed by
supply are several concerns Wilson sees becoming more obvious in
the coming weeks.
But while he is less bullish on the more speculative and
cyclical parts of the market, the firm retains high conviction
in its reflationary view over the next 12 months and remains
overweight financials, materials and
industrials.
(Chuck Mikolajczak)
*****
FRANCE'S CAC 40 SHINES AT THE CLOSE (1206 EDT/1606 GMT)
Granted, the STOXX 600 ticking down 0.07% at the
close doesn't make the session particularly exciting but among
the few things that stood out in Europe today was France's CAC
40.
The Paris blue chip index was not only one of the few to end
the day in the black (+0.15%) it also came closer to reclaiming
dotcom bubble highs.
At 6,296 points, the CAC 40 is back at its highest since
November 2000 lifted by heavyweights from different sectors of
the economy.
Real estate group Unibail was up 2%, payment tech
Worldline grew 1.7%, supermarket chain Carrefour
rose 1.5% and pharmaceutical giant Sanofi
took in 1.4%.
The IBEX had the best overall performance, rising 1.1%
with a robust banking sector but Madrid is still over
10% below its 2020 pre-COVID highs.
Banks were the top gainers across Europe with the
sector up 0.7% with a big jump in yields for Germany's bund as
the Green Party looks increasingly likely to play a major role
after the country's September general election.
(Julien Ponthus)
*****
SAILING THROUGH THE RETURN DISPERSION DOLDRUMS (1103
EDT/1503 GMT)
Wall Street is coasting past closing highs on a regular
basis, stock market volatility is down, volume is low and return
dispersion is below its long-term average.
Goldman Sachs' Weekly Kickstart note addresses this dip in
return dispersion (RD) - or the range of potential returns -
drilling down to sectors and stocks, identifying those with "the
best combination of micro-driven returns and high idiosyncratic
risk."
While RD rose in 2020 to its highest level since the Great
Recession, "low volatility has outweighed low correlations among
stocks, driving return dispersion back below the long-term
average," writes David Kostin, chief U.S. equity strategist at
Goldman.
On the sector level, communication services,
energy and tech currently have the widest
3-month return dispersion, the note says, while the same
measurement is tightest for "macro-driven" sectors like
utilities and financials.
Kostin notes that fund performance, which is "often
strongest during periods of high return dispersion, as the
stock-picking opportunity set is wide and rewards effective
bottom-up stock pickers." As such, fund performance has been
mixed amid dropping RD.
Tax reform, infrastructure legislation and pricing power are
likely to be the "key catalysts" that could push RD higher, the
broker says.
Goldman has applied a "dispersion score" to the S&P 500
constituents. The stocks that score the highest are likely to
have "heightened responses to idiosyncratic company-specific
news," they also offer "the best alpha generation opportunities
for investors," Kostin says.
The table below, courtesy of Goldman, shows the 25 stocks
"with the best combination of micro-driven returns and high
idiosyncratic risk," according to the broker (click to enlarge):
(Stephen Culp)
*****
SLUGGISH START ON WALL STREET (0958 EDT/1358 GMT)
Major U.S. averages are modestly lower out of the gate on
Wall Street, despite an earnings season that has begun to pick
up steam.
Trading volume has also fallen off a cliff, topping 10
billion shares across all U.S. exchanges only once in the prior
eight sessions, a level not seen since the waning days of 2020.
Tesla is weighing on both the S&P 500 and
Nasdaq following a crash in Texas that resulted in the
deaths of two men, while bitcoin recovered only
slightly from a sharp drop over the weekend.
The majority of S&P sectors are in the red, led lower by
industrials while energy is the best
performing group as oil prices are being buoyed by a weaker
dollar.
Below is your market snapshot:
(Chuck Mikolajczak)
*****
EUROPEAN AIRLINES: THE BALANCE SHEET DILEMMA (0930 EDT/1330
GMT)
When will Europeans fly again? The uncertainty over when air
travel can resume to normal levels is providing a headache for
CFOs in the industry.
As HSBC analysts note, many airlines will eventually need to
beef up their balance sheets but the resurgent pandemic means
the timing to do so and deploy capacity is more than tricky.
Looking into easyJet, the team at HSBC says "an
early move to raise equity would potentially offer peace of mind
in the event of extended travel restrictions, greater strategic
optionality and a quicker dilution of the founder Stelios
HajiIoannou, who has said he will not participate in any rights
issue".
Then again, moving before the expected bounce back could be
a costly choice for shareholders.
"An earlier capital raising would likely be more dilutive
than a later one when the recovery of aviation is clearer", they
note, stressing they expect demand to be robust once
restrictions are lifted.
At the moment, HSBC expects travel restrictions to ease and
capacity to rise late in May.
(Julien Ponthus)
*****
NASDAQ COMPOSITE: GENERALS IN THE TRENCHES (0900 EDT/1300
GMT)
The Nasdaq Composite has rallied strongly so far in
April. The tech-laden index is up 6%, putting it on track for
its biggest monthly advance since November of last year.
However, since the Composite's February top, a measure of
internal strength, the Nasdaq daily Advance/Decline (A/D) line
, has been coiling in a contracting range, and is so far
failing to confirm the most recent push higher in the Composite:
Although IXIC ended Friday less than 0.4% from its February
12 record high close of 14,095.47, the A/D line is remains well
below its mid-March and early-February highs.
Ultimately, to add confidence in the sustainability of any
Nasdaq thrust into fresh record high territory, traders will
want to see the A/D line surpass its 2021 highs.
Of note, recent Nasdaq strength has no doubt been
underpinned by large-cap tech, the generals, outperforming
small-cap tech, the troops. Indeed, the Technology Select Sector
SPDR Fund is up around 7.5% this month, while NYSE
FANG+TM index has advanced around 8.5%. Meanwhile, the
Invesco S&P SmallCap Info Tech ETF is up just a little
over 3%.
Unless, broad market strength more resolutely returns, the
A/D line may remain on the back foot. In that event, the burden
on the generals in the trenches may grow more intense, leaving
their flanks especially exposed to a bearish counterattack.
(Terence Gabriel)
*****
FOR MONDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
