Equities: Cyclicals lead as geopolitical reversal trade extends – Danske Bank

Danske Research Team notes global equities extended gains, with Stoxx 600 up 1.4% and S&P 500 up 0.5% in a geopolitical reversal trade. Cyclicals outperformed defensives, though investors remain only cautiously optimistic. Higher Oil prices overnight weighed on Asian markets and equity futures, which were indicated lower in both the US and Europe.

Cyclicals outperform but optimism cautious

"Equities continued higher yesterday, Stoxx 600 up 1.4% and S&P 500 up 0.5%. This was a geopolitical reversal trade, with cyclicals outperforming defensives, yet a selective one, as investors are at best cautiously optimistic. Materials, health care, consumer discretionary and industrials up 1-2%."

"Interesting dynamics in the tech space yesterday. Big tech mostly higher, along with semis and memory companies, while the software space was weaker again. Trigger for the move was Broadcom out yesterday saying that is experiencing significant supply chain constraints due to surging AI chip demand straining production capacity. "

"These pressures are now spilling over beyond semiconductors into PCBs and other components, with capacity limitations pushing lead times from approximately six weeks out to six months. If a company of Broadcom's scale is running into these constraints the situation further down the value chain is likely to look even more challenging."

"Similarly, CPU giants Intel and AMD notified customers of price increases. The backdrop is the same story, with worsening supply constraints pushing delivery lead times from 1-2 weeks to 12 weeks or longer. This is a theme to monitor closely ahead of the upcoming Q1 earnings season, as a shortage of components could impact many sectors."

"Oil prices have edged somewhat higher again over night and as a result, Asian markets are down 1-2% this morning. US and European equity futures are -0.5% lower this morning."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)