While the rally continued for the German Dax and the British FTSE, Nasdaq and S&P500 fell, while Dow Jones 30 continued its upward momentum. Let’s explore the reasons for these disparate.
On the one hand, we should note that investors left behind the concerns regarding the potential negative Omicron consequences on the economy. The latest statements from the World Health Organization confirmed the lower severity of the disease, despite its greater contagion capacity. This means that the fear of an economic slowdown caused by restriction and confinement measures practically disappears.
The stocks that benefit from these more optimistic expectations of the economy are the cyclical ones, which have a deeper correlation with economic growth. We need not look any further than European indices such as the Dax or North American Dow Jones, both showing sharp rises during yesterday’s trading.
On the other hand, market interest rates continued to rise, with the 10-year bond yield reaching 1.68%, while the employment data turned out positive and inflation remained at high levels. In this regard, Friday's US employment report and the inflation figures scheduled for publishing next week could be critical for investors.
And this rise in financing costs due to the increase in market interest rates has a negative and direct effect on technological stocks with high financing needs and historically high valuations. Because the Nasdaq technology index detached itself from the upward movement of the other indices, experiencing significant falls, leading technology companies such as Tesla, Amazon, Apple, or Alphabet were dragged down.
The US dollar continued to strengthen as interest rates rose. The USD/JPY, highly correlated with the US bond yields and favored by the increase in market risk appetite, saw the biggest gains.
A more atypical behavior was seen in the case of GOLD. Despite higher interest rates and a stronger dollar, the precious metal recovered from the lows reached the previous day below 1800 to the area around 1815, although still away from the resistance zone of 1831. This upward movement cannot be attributed to an increase in inflationary expectations, especially after the price component of the ISM manufacturing published yesterday showed a notable decline to 68.2 from the expected 79.2. In the next sessions, we will know if this movement yesterday is due to a specific investment flow and if gold will return to the usual market correlations.
Sources: Bloomberg, Reuters.