More pain in store for small caps

<html xmlns=""><head><title>LIVE MARKETS-More pain in store for small caps</title></head><body>

Main U.S. indexes in negative territory: Nasdaq off ~0.8%

Materials weakest S&P 500 sector; energy leads gainers

KBW regional banking index rallies ~3%

Dollar, gold up slightly; bitcoin up >1%; crude up ~2%

U.S. 10-Year Treasury yield edges down to ~3.71%

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at


While the small cap Russell 2000 .RUT is showing a modest gain on Tuesday and nicely outperforming the large cap S&P 500 .SPX, recent weakness among stocks down the cap scale is likely to continue, according to Chris Haverland, global equity strategist at Wells Fargo Investment Institute (WFII).

Haverland notes that since the start of the min-crisis in the banking sector in early March, the small and microcap .RUMIC indexes have significantly underperformed their large cap brethren.

The failure of several regional banks such as SVB Financial SIVBQ.PK and Signature Bank SBNY.PK weighed on the Russell 2000, which has a relatively high allocation of about 15% to the financial sector, according to Haverland. In addition, the tighter lending standards will "likely will be a headwind for not only the regional banks, but also the smaller companies in the index that rely more heavily on borrowing to fund business operations."

Small caps, being highly cyclical, have generally underperformed large caps late in the economic cycle and early stages of a recession historically. As WFII anticipates a recession later this year, along with their economic sensitivity, Haverland says WFII has been "unfavorable" on U.S. small caps since early 2022, with the recent upheaval in the banking sector prompting another downgrade to "most unfavorable."

Haverland also says the number of "zombie companies," or those that are financially distressed and on the brink of insolvency, in indexes down the cap scale is well above the long-term average.

However, while Haverland says WFII currently favors large caps, smaller names have the potential to outperform as they have historically led performance in the early stages of economic recoveries, which they see emerging in 2024 as the recession ends, along with the Fed cutting rates and easing credit conditions.

(Chuck Mikolajczak)



The strong positive momentum in U.S. tech stocks continues to power domestic large-cap equities higher, with the Nasdaq Composite .IXIC now up more than 21% YTD versus just a 9% rise for the S&P 500 index .SPX.

Jessica Rabe, co-founder of DataTrek Research, has some thoughts on this outperformance.

Rabe notes that the IXIC still needs to rally by around 26% to return to its all-time closing high in November 2021. Meanwhile, she says that no U.S. big tech stock has set a new record high this year, but that the ones closest to setting a new price record are those likely to benefit the most and soonest from gen AI (e.g., Nvidia NVDA.O, Microsoft MSFT.O, Alphabet GOOGL.O and Apple AAPL.O).

In any event, Rabe makes a number of other points that may hearten bulls including that the Nasdaq Composite almost always rallies following a down year.

Additionally, Rabe believes that those worried that gen AI buzz is fueling a tech stock bubble, history says to look for the NASDAQ Composite doubling in a year before worrying those gains will lead to a subsequent crash.

"History says the NAS rebounds strongly after a down year as it just experienced, and an outsized January return like this year typically provides the momentum to do so barring an exogenous shock," writes Rabe.

She adds, "While a 'gen AI' tech bubble could be brewing, the NAS has not advanced even remotely far enough to suggest a top anytime soon."

(Terence Gabriel)



Two sets of data released on Tuesday once again illustrated the United States' predilection for new things. In this case, new experiences in the form of travel/leisure services, and new homes.

To start with, U.S. business activity appears to be expanding this month, thanks to the services sector.

S&P Global released its initial "flash" purchasing managers' indexes (PMI) for the manufacturing USMPMP=ECI and services sectors USMPSP=ECI.

While manufacturing unexpectedly dipped into contraction - shedding 1.7 points to 48.5 - services expansion surprised in the under direction, jumping 1.5 points to 55.1.

The composite reading, which aggregates the two, rose 1.1 points to 54.5, the highest reading since April 2022.

A PMI number north of 50 indicates expansion from the prior month, below that level signifies monthly contraction.

"An increasing dichotomy is evident," writes Chris Williamson, chief business economist at S&P Global. "While service sector companies are enjoying a surge in post-pandemic demand, especially for travel and leisure, manufacturers are struggling with over-filled warehouses and a dearth of new orders as spending is diverted from goods to services."

"The inflation picture is also changing," Williamson adds. "It is now the service sector's turn to be hiking prices amid resurgent demand and an inability to cope with order inflows due to a lack of capacity."

Sales of freshly constructed U.S. homes USHNS=ECI unexpectedly grew by 4.1% in April to 683,000 units at a seasonally adjusted annualized rate, according to the Commerce Department.

The number fell to the north of the 665,000 unit consensus, but follows a sharp downward revision of the March increase - to 4.0% from 9.6%.

As such, the inventory of new homes available on the dipped to 7.6 months supply, the tightest level in a year (this means at the current sales pace, it would take 7.6 months to sell every new home on the market).

As evidenced by solid housing starts, building permits and homebuilder sentiment lately, the inventory drought of pre-owned homes - which account for the lion's share of total U.S. home sales - have turned perspective buyers to new construction in recent months.

"Buyers continued to look to new construction homes due to the lack of inventory in the resale market, as many would-be sellers decide to hold on to their low mortgage rates," says Kelly Mangold, principal at RCLCO Real Estate Consulting. "Low unemployment rates and work-driven relocations continue to fuel sales."

Investors didn't pay a whole lot of attention to today's data, preoccupied with the ongoing mud-wrestling match in Washington over whether the U.S. should raise its debt limit in order to pay its bills.

All three major indexes were slightly in the red, off earlier lows, with Apple AAPL.O and Microsoft MSFT.O weighing heaviest.

(Stephen Culp)



China's ban on the use of U.S.-based Micron Technology's MU.O chips in key domestic industries, widely seen as a tit-for-tat move to the United States' efforts to restrict Beijing's access to key technology, could hurt chip industry recovery.

The semiconductor industry, which has been at the center of Sino-U.S. trade tensions, entered a steep downturn last year after high inflation and a bleak global economic outlook eroded demand for gadgets from personal computers to smartphones to TVs.

The ban "postpones not only the anticipated recovery in MU but also jeopardizes the overall anticipated turn around in the entire chip sector!," said Dan Morgan, senior portfolio manager at Synovus Trust Company.

Wall Street was looking for a chip sector recovery starting third quarter of this year, he added.

After China's cyberspace regulator imposed the ban on Micron, the biggest U.S. memory chipmaker, for failing its network security review, analysts worried the ban could also extend to other markets like smartphones and also to other U.S.-based companies, many of which derive large chunks of their revenue from sales in China.

"We are not sure which other American memory companies China could target next but Western Digital is the other American company that supplies NAND flash into China to Chinese infrastructure OEMs," said Kinngai Chan, analyst at Summit Insights Group.

The gap left my Micron, could be filled by South Korea's Samsung Electronics 005930.KS and SK Hynix 000660.KS in the near term, according to analysts as growing geopolitical tensions trigger a re-mapping of the semiconductor supply chain.

"Incidents like this will add to the ongoing reconfiguration of the global chip supply chain," said Redmond Wong, a China-based market strategist at Saxo Bank.

(Chavi Mehta)



Major U.S. indexes are slightly lower in the early stages of trading on Tuesday, as investors look for signs of progress on debt ceiling talks after a meeting between President Joe Biden and House Speaker Kevin McCarthy on Monday failed to bear fruit.

Negotiators for the White House and congressional Republicans are set to meet again on Tuesday to talk about raising the government's $31.4 trillion debt ceiling. A report from Punchbowl news outlet said McCarthy told fellow Republican lawmakers a deal was not imminent.

Still, equities are off their initial lows, paring declines after S&P Global said on Tuesday its flash U.S. Composite PMI Output Index rose to a 13-month high of 54.5 in May.

Energy .SPNY is the leading sector, rising nearly 2% as crude prices gained on optimism the U.S. would manage to avoid a default, along with a tighter market outlook and a warning from the Saudi energy minister that hinted at the possibility of further production cuts.

Materials .SPLRCM and consumer staples .SPLRCS are the worst performing sectors thus far in the session.

Below is an early market snapshot:

(Chuck Mikolajczak)



A lag in China’s industrial cycle is depriving the euro from additional external demand-related tailwinds, according to CitiFX strategists, who have curbed their "euro enthusiasm" as a result.

Vasileios Gkionakis, EMEA Head of CitiFX G10 Strategy at Citi Markets, now expects EURUSD to trade in a range of 1.07-1.12, having previously argued for EURUSD rising closer to 1.15 last November. The currency was last at 1.078 EUR=.

In a note, Gkionakis said his team still considers the ECB underpriced and sees further euro zone terms-of-trade improvement due to natural gas price declines.

But that is not enough to offset China growth concerns.

"The April economic data coming out of China has disappointed many, us included, particularly when it comes to trade activity, with imports in April contracting by 7.9% YoY," writes Gkionakis.

In turn, this has increased the risk that euro zone exports to China will either stall or rise at a very slow pace, he adds.

There is one scenario that could see their enthusiasm return.

That is if the "US-RoW (rest of the world) growth expectations differential resumes declining, potentially due to China firing up stimulus," which Gkionakis says would be outright supportive of the currency converging towards 1.15.

(Lucy Raitano)



President Joe Biden and House Speaker Kevin McCarthy could not reach an agreement on Monday on how to lift the $31.4 trillion debt ceiling ahead of the June 1 deadline, but vowed to keep talking.

Meanwhile, on Monday, the U.S. 10-year Treasury yield US10YT=RR ended higher for a seventh-straight day. The yield last rose seven days in a row in early April of last year. The yield last rose more than seven-straight days when it posted a nine-day win streak in mid-September 2017.

On Tuesday, the yield has hit 3.7610%, or its highest level since March 13 of this year:

Given the streak, the yield's rise appears stretched shorter-term. That said, traders are eyeing the resistance line from the October 2022 high, which now comes in around 3.92%, as the next significant hurdle. The 23.6% Fibonacci retracement of the 1981-2020 yield decline is at 3.9765%.

Initial support is at 3.67%, but the yield may now need to reverse back below the 3.62%-3.58% area, which includes the 100- and 200-day moving averages, to suggest a return of greater downside pressure.

(Terence Gabriel)




Early trade May 23

Major US chip firms derive substantial revenue from China

Flash PMI

New home sales

Stock performance down the cap scale

(Terence Gabriel is a Reuters market analyst. The views expressed are his own)


Disclaimer: De entiteiten van de XM Group bieden diensten en toegang tot ons online handelsplatform op basis van uitsluitend-uitvoering, waardoor een persoon de beschikbare content op of via de website kan bekijken en/of gebruiken, zonder dat dit is bedoeld voor wijziging of uitbreiding. Dergelijk(e) toegang en gebruik vallen onder: (i) de algemene voorwaarden; (ii) risicowaarschuwingen; en de (iii) volledige disclaimer. Dergelijke content wordt daarom alleen aangeboden als algemene informatie. Wees u er daarnaast vooral van bewust dat de inhoud op ons online handelsplatform geen verzoek of aanbieding omvat om transacties op de financiële markten uit te voeren. Het beleggen op welke financiële markt dan ook vormt een aanzienlijk risico voor uw vermogen.

Alle materialen die op ons online handelsplatform worden gepubliceerd zijn bedoeld voor educatieve/informatieve doeleinden en omvatten geen – en moeten niet worden beschouwd als het bevatten van – financieel, vermogensbelastings- of handelsadvies en aanbevelingen, of een overzicht van onze handelsprijzen, of een aanbod of aanvraag van een transactie in financiële instrumenten of ongevraagde financiële promoties voor u.

Alle content van derden, alsmede content die is voorbereid door XM, zoals opinies, nieuws, onderzoeken, analyses, prijzen en andere informatie of koppelingen naar externe websites op deze website worden aangeboden op een 'zoals-ze-zijn'-basis, als algemene marktcommentaren, en vormen geen beleggingsadvies. Voor zover dat content wordt beschouwd als beleggingsonderzoek, moet u zich ervan bewust zijn en accepteren dat de content niet bedoeld was en niet is voorbereid in overeenstemming met de wettelijke vereisten die zijn opgesteld om de onafhankelijkheid van beleggingsonderzoek te bevorderen en als zodanig onder de geldende wetgeving en richtlijnen moet worden beschouwd als marketingcommunicatie. Zorg ervoor dat u onze Mededeling over niet-onafhankelijk beleggingsonderzoek en risicowaarschuwing in verband met de voorgaande informatie doorneemt en begrijpt; die kunt u hier lezen.

We gebruiken cookies om u de beste ervaring op onze website te bieden. Meer lezen of wijzig uw cookie-instellingen.

Risicowaarschuwing: Uw vermogen loopt risico. Hefboomproducten zijn mogelijk niet voor iedereen geschikt. Lees onze informatie over risico's.