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Nasdaq to Outperform Dow Jones as Reflation Trade Loses its Luster

Nasdaq to Outperform Dow Jones as Reflation Trade Loses its Luster

Daniel Moss, Analyst


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Nasdaq, Dow Jones, Reflation Trade, Treasury Auctions, CPI Data – Talking Points:

  • Strong demand for Treasuries and a relatively in-line inflation print could open the door for the tech-heavy Nasdaq to outperform the Dow Jones in the coming weeks.
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Asia-Pacific Recap

Equity markets gained ground during Asia-Pacific trade as investors dismissed a notable rise in US inflation data overnight. Australia’s ASX 200 climbed 0.66% on the back of the local consumer sentiment index climbing to an 11-year high. Hong Kong’s Hang Seng Index surged 1.23% and China’s CSI 300 rose 0.71%. Japan’s Nikkei 225 proved to be the laggard, sliding 0.44% as coronavirus infections continued to climb in Osaka.

In FX markets, the cyclically-sensitive Australian and New Zealand Dollars outperformed their major counterparts, while the haven-associated Japanese Yen and US Dollar slipped lower. Gold prices nudged marginally higher as yields on US 10-year Treasuries stabilized at 1.63%. Looking ahead, speeches from several members of the Federal Reserve and ECB President Christine Lagarde headline the economic docket, alongside industrial production figures out of the Euro-area.

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CPI Data, Robust Treasury Demand to Buoy Tech Sector

The tech-heavy Nasdaq 100 index may outperform the benchmark Dow Jones in the near term, as the Reflation Trade that saw yields surge higher in recent months pauses for breath.

Although consumer price inflation data released overnight came in hotter than consensus estimates, at 2.6% (exp. 2.5%), this failed to concern market participants who appeared to have priced in a more aggressive print.

Indeed, US 10-year Treasury yields slipped lower immediately after the release. Strong demand for longer-term Treasuries at the 30-year auction also accelerated the decline in rates of return, with the bid-to-cover ratio – a measure of demand – coming in well above average.

US Consumer Price Inflation (2015 – Present)

The paused rollout of Johnson & Johnson’s coronavirus vaccine, following a handful of rare blood clotting events, also appears to have driven capital flows into haven-linked bonds.

This dynamic will likely pave the way for the duration trade to gain favour once again, with the tech-heavy Nasdaq 100 probably leading US benchmark indices higher in the coming weeks.

Dow Jones Futures Daily Chart – Wedge Resistance In Focus

Chart prepared by Daniel Moss, created with Tradingview

From a technical perspective, the Dow Jones’s outlook appears somewhat bearish as prices struggle to penetrate psychological resistance at 33,700.

Below average volume, in tandem with the RSI sliding back into normal territory, suggest that bullish momentum is fading.

A daily close back below the 8-EMA (33439) could intensify near-term selling pressure and generate a pullback to former resistance-turned-support at the March high (33134).

Alternatively, a push above the monthly high (33712) to fresh record highs would likely signal the resumption of the primary uptrend and bring the 33400 mark into play.

The IG Client Sentiment Report shows 31.58% of traders are net-long with the ratio of traders short to long at 2.17 to 1. The number of traders net-long is 22.51% higher than yesterday and 4.14% higher from last week, while the number of traders net-short is 11.59% lower than yesterday and 4.64% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Wall Street prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current Wall Street price trend may soon reverse lower despite the fact traders remain net-short.

Nasdaq 100 Futures Daily Chart – RSI Hints at Further Gains

Chart prepared by Daniel Moss, created with Tradingview

The Nasdaq, on the other hand, seems poised to extend its push to fresh record highs as prices slice easily through February high (13900) resistance.

With the MACD surging to its highest levels since late-February, and the RSI eyeing a push into overbought conditions, the path of least resistance appears skewed to the upside.

Remaining constructively positioned above 13900 suggests that the Nasdaq will continue climbing higher in the near term, with the 78.6% Fibonacci expansion (14530) the next key level of resistance.

However, if support gives way, a decline to the 8-EMA (13734) could be on the table.

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.