Rotation into small caps & broader market continues

The rotation into industrials, financials and smaller companies pushes the Dow Jones to new highs as the rally continues to broaden into underperforming sectors.

The Dow Jones had its best day since June 2023 surging 742 points or 1.85 per cent, to close at a record 40,954. The S&P 500 closed 0.64 per cent higher and the Nasdaq finished the day 0.2 per cent higher as Tech took a back seat to other sectors.

In more good news for the smaller end of town, the small cap focused Russell 2000 surged more than 3.5 per cent for its fifth straight day of gains, as investors continue to rotate towards the underperforming smaller companies. The Russell 2000 is now up more than 11 per cent over the last week.

Investors also continued to shift into bigger cyclical names, as the rising confidence on Fed rate policy continues to point to a rate cut sooner rather than later. Industrial bellwether Caterpillar surged more than 4 per cent. Insurer UnitedHealth rallied more than 6 per cent following better-than-expected second-quarter results. Financials also gained after earnings from Bank of America and Morgan Stanley came in ahead of consensus. Bank of America jumped more than 5 per cent, while Morgan Stanley added nearly 1 per cent.

In contrast, the Tech names remained muted in trading with AI giant Nvidia closing 1.6 per cent lower on the day and Alphabet finishing down 1.4 per cent.

According to the CME FedWatch tool, traders now see 100 per cent odds the Fed will lower rates in September. A rate cut cycle is seen as a material positive to small caps, industrials and other cyclicals in general as borrowing costs fall.

Retail sales data released on Tuesday also contributed to growing optimism that soft landing is possible. June retail sales came in unchanged versus consensus expectations of a fall.

Turning to US sectors, all closed higher overnight except for Tech and Communication Services. Industrials was the best performer, closing higher by over 2.5 per cent.

Futures

The SPI futures are pointing to a 0.7 per cent gain.

Currency

One Australian dollar at 7.25am was buying 67.34 US cents.

Commodities

Gold has added 1.60 per cent. Silver has gained 1.71 per cent. Copper has dropped 1.70 per cent. Oil has lost 1.40 per cent.

Figures around the globe

European markets closed lower. London’s FTSE fell 0.22 per cent, Frankfurt lost 0.39 per cent, and Paris closed 0.69 per cent lower.

Turning to Asian markets, Tokyo’s Nikkei added 0.20 per cent, Hong Kong’s Hang Seng lost 1.60 per cent while China’s Shanghai Composite closed 0.08 per cent higher.

Yesterday, the Australian share market closed 0.23 per cent lower at 7999.32.

Ex-dividends
Staude Capital Global Value Fund (ASX:GVF) is paying 1 cent fully franked
Turners Automotive Group (ASX:TRA) is paying 6.8743 cents 85 per cent franked

Sources: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics, CoinMarketCap.

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