LIVE MARKETS Russell 2000 should still lag in 2022-Goldman

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  • Major U.S. indexes near flat; chip stocks outperform
  • Energy leads S&P sector gainers; comm svcs weakest group
  • Dollar, bitcoin, gold rise; crude falls
  • U.S. 10-Year Treasury yield ~1.92%

Feb 7 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

RUSSELL 2000 SHOULD STILL LAG IN 2022-GOLDMAN (1310 EST/1810 GMT)

The Russell 2000 small-cap index (.RUT) has underperformed the S&P 500 (.SPX) recently, and it should continue to lag the benchmark index in 2022, Goldman Sachs strategists wrote in a recent note.

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Among the headwinds for the small-cap index: decelerating GDP growth, they said.

"Russell 2000 is tilted to cyclical sectors," including financials and industrials, "and away from technology," they noted.

"Small-cap firms generally have weaker balance sheets, lower profit margins, and less market power, all of which make them highly sensitive to economic growth environments. The returns of the Russell 2000 vs. S&P 500 are generally correlated with other market reflections of expected economic growth," they wrote.

Also, they wrote, tightening financial conditions, slowing growth, and a flattening yield curve should all pressure Russell 2000 returns relative to the S&P 500.

"During the last 20 years, the Russell 2000 generated a return very similar to that of the S&P 500. However, the small-cap index has underperformed on average during periods where either the yield curve was flattening, economic growth was elevated and declining, or financial conditions were tightening. All three of these dynamics describe our economists' 2022 outlook," they wrote.

They recommend investors focus within the small-cap space on stocks with a combination of strong growth, high profit margins, and undemanding valuations.

Meanwhile, the S&P 500 is off more than 5% so far this year, while the Russell 2000 is down more than 10% year-to-date.

(Caroline Valetkevitch)

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EARNINGS SEASON HALFTIME HUDDLE: TECH THE STANDOUT SO FAR (1205 EST/1705 EST)

Tech, excluding consumer-related internet names, has been the standout sector in terms of stock price reactions to earnings so far. This according to Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.

According to Calvasina, at a little more than 50%, Tech has the highest percentage of companies with their stock prices up 1% or more immediately following their earnings among all of the GICS sectors.

On 2022 EPS growth forecasts, in percentage terms, she says that expectations have improved for energy, materials, healthcare, and tech. Meanwhile, they've weakened for consumer discretionary, communication services, financials and utilities. She adds that Growth and Value along with Secular, Cyclical and Defensives are well represented among both the leaders and laggards on this metric, "lending support to the idea that the positioning trades feel a little messy from an earnings perspective at the moment."

That said, Calvasina also notes that the rate of upward EPS estimate revisions has been slightly stronger in Value than Growth, and weaker in Defensives than Cyclicals.

"At the sector level, we prefer to look at the rate of upward revisions for both EPS and sales. And that vantage point once again reminds us that the story is a bit more complicated with Financials, REITs, and Energy (and to a lesser degree Tech and Health Care) outranking the other major sectors."

(Terence Gabriel)

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STRONG CPI DATA COULD BOOST FED HIKE EXPECTATIONS, HURT BONDS (1100 EST/1600 GMT)

U.S. inflation data on Thursday may be key to whether the bond rout that has sent benchmark Treasury yields to two-year highs is likely to continue, with investors likely to price for more aggressive rate hikes if the number comes in stronger than expected, according to Morgan Stanley.

Consumer Price Index (CPI) data on Thursday is expected to show that prices rose 0.5% in January, and are up 7.3% on the year, according to the median estimate of economists polled by Reuters.EM

However, "an upside surprise next Thursday would mean further talk of the Fed raising rates 50bp in March. At a minimum, calls for the Fed to hike at every meeting this year will look much less off-base," Morgan Stanley analysts including Matthew Hornbach said in a report.

The Federal Reserve said last month that it is likely to hike interest rates in March as it tackles persistent inflation, though fed funds futures traders are pricing in only a 37% chance of a 50 basis point increase that month. Five increases of 25 basis points are priced in by December. FEDWATCH read more

“An upside surprise on January US CPI next week followed by further strength in nonfarm payrolls and even more inflation in February could get expectations of a 50bp hike in March to solidify. That outcome would certainly jolt expectations for Fed policy this year - and investors aren't adequately protected against that, given current market prices, we think,” the Morgan Stanley analysts added.

Benchmark 10-year Treasury yields jumped to two-year highs on Monday, after data on Friday showed that the U.S. economy created far more jobs than expected in January, despite the disruption to consumer-facing businesses from a surge in COVID-19 cases. They are at 1.94%, up from 1.50% at year-end. read more

(Karen Brettell)

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NASDAQ UP ON AMAZON BOOST (1001 EST/1501 GMT)

The Nasdaq (.IXIC) is higher in early trading Monday, with Amazon.com providing a boost. The S&P 500 (.SPX) is roughly flat, while the Dow (.DJI) is just slightly red.

Meanwhile, shares of Peloton Interactive Inc (PTON.O) are up about 25% following media reports that Amazon and Nike are exploring a potential buyout offer for the exercise bike maker.

All three of the major indexes ended a volatile week of trading Friday with weekly gains.

Here is the early market snapshot:

Feb 7

(Caroline Valetkevitch)

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AMID JUNKY ACTION, S&P 500 TURNS TRASHY (0900 EST/1400 GMT)

Action in the riskiest of corporate bonds can potentially provide an important signal for the equity market. Although timing can be blunt, struggling high-yield price action can be a sign of less than buoyant sentiment, ultimately leading to equity market instability.

Indeed, as a proxy for the high-yield sector, the SPDR Bloomberg Barclays High Yield Bond ETF (JNK.P) had broken below its 200-day moving average (DMA), and been diverging from the S&P 500 (.SPX), when the equity index topped in early January:

SPXJNK02072022

Of note, just looking back to early 2020, in the wake of new record highs in stocks, S&P 500 tops of varying degree came in the wake of even minor JNK divergence.

From its early-January peak to its late-January low, the SPX broke below its 200-DMA, and collapsed nearly 10%. In so doing, the benchmark index fell to its lowest level since early-October 2021. The SPX has since reclaimed its 200-DMA and bounced around 4%.

Meanwhile, JNK continues to trade below its 200-DMA, and ended Friday at its lowest level since early-November 2020.

In order to add confidence in the sustainability of the equity market's bounce, traders may look for the JNK to quickly reverse to the upside in order to confirm any ongoing S&P 500 rally. read more

On the plus-side, the JNK did form a bullish hammer candle on Friday, suggesting it is primed for a turn of some kind. However, it has work to do if it is to get back in-gear with the SPX, and repair its recent chart damage.

(Terence Gabriel)

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

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