Daily market review

United States

Rotation out of value stocks back into momentum stocks left equities mostly weaker Tuesday as skepticism crept in regarding the market's bullish expectations and as some saw the recent rally in cyclicals as overdone. Markets also reflected caution heading into the Federal Reserve's policy announcement due Wednesday, amid concerns the Fed may project a better economy and faster withdrawal of its huge stimulus. The Dow Jones industrial index declined 1.1 percent; the S&P 500 was off 0.8 percent, but the NASDAQ edged up 0.3 percent.

The recent shift into value stocks appeared to reverse Tuesday, with the FAANGs, biotech, and software sectors outperforming while recent winners, including travel, airlines, paper/packaging, and building materials, retreated. Several reports noted investors were borrowing heavily to gobble up shares of beaten-down companies that continue to struggle in the face of the pandemic, including oil drillers and travel companies.

Among companies in focus, Chesapeake Energy dropped 66 percent after trading was halted, news pending, and Bloomberg reported a bankruptcy filing is possible for the oil explorer. On the positive side, Macy's, the iconic retailer, rose 2.6 percent on an earnings beat and relatively upbeat report on its prospects. Luxury retailer Tiffany rose 2.0 percent after reporting better business in its key Chinese market, despite weakness elsewhere.

These price data reflect observations at 4:00 PM US ET: Dated Brent spot crude oil rose 13 cents to US$40.97, while spot gold rose US$15.63 to US$1,713.98. The US dollar weakened against most major currencies. The US Treasury 30-year bond yield fell 6 basis points to 1.58 percent while the 10-year note yield fell 5 basis points to 0.83 percent.


Weakness in energy and banking stocks and other cyclicals depressed equities Tuesday. The Europe-wide STOXX 600 declined 1.2 percent, the German DAX and French CAC both declined 1.6 percent, and the UK FTSE-100 dropped 2.1 percent.

Euro area banks dropped after an EU regulator said banks should delay paying dividends for now. Oil stocks fell as crude oil prices retreated amid skepticism over the latest OPEC accord to limit supplies. Other cyclicals, including autos and travel stocks, suffered declines, while health care and technology shares fared better.

Among companies in the news, British American Tobacco fell 3.1 percent after cutting its guidance in response to the lockdown impact on sales. Airbus Group fell 7.6 percent after issuing an update on its gloomy business situation and the French government bailout.

In economic data, German merchandise trade data showed the drastic impact of the pandemic on Europe's exporting powerhouse. The country's trade surplus was just €3.2 billion in April, down from €12.8 billion in March and the lowest since December 2000. The deterioration reflected weakness in exports which slumped an unprecedented 24.0 percent on the month to €75.5 billion, their lowest reading in two decades. The slide here easily more than offset a record 16.5 percent nosedive in imports to €72.3 billion.

Asia Pacific

Major Asian markets posted mixed results Tuesday, with a very light regional data calendar providing little guidance to investor sentiment. Trading resumed in Australia after a national holiday Monday, with the All Ordinaries index gaining 2.4 percent as it caught up on gains made elsewhere in the region after Friday's strong US payrolls report. Hong Kong's Hang Seng index also recorded a solid increase, up 1.1 percent. Trading in shares in local airline Cathay Pacific was suspended after reports that it will receive significant financial support from the Hong Kong government to assist its recovery from the Covid-19 pandemic's impact. The Shanghai Composite index closed up 0.6 percent, while Japan's Nikkei and Topix indices underperformed with declines of 0.4 percent and 0.1 percent respectively.

Looking ahead*

On Wednesday in Asia/Pacific, Japanese machine orders, Japanese PPI, Chinese CPI, and Chinese PPI reports are due. In Europe, the French industrial production report is scheduled. In North America, the FOMC policy announcement and Fed chair press conference are the main events, plus US CPI and Treasury budget reports are on tap.

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