Tuesday, December 6, 2016 - Despite the uncertainty unleashed from this weekend's Italian referendum, major global equity indices all rose on Monday, as investors continue to contemplate the 'No' vote's long-term impact on the markets. The S&P 500 registered its best day in two weeks, climbing 0.6%, while the Nasdaq Composite and DJIA advanced 1% and 0.2% respectively. Surprisingly, after opening in the red Monday morning, European stocks finished in positive territory, with the Stoxx Europe 600 adding 0.6%. The resilience of European equities, along with positive incoming economic data, helped spur a continuation of the post-election rotation into riskier assets.
Leadership in the major US indices was driven by familiar sectors as the post-election Trump rally maintained its momentum. Cyclical sectors continued their resurgence, while the financials, consumer discretionary, and energy sectors advanced 1.2%, 1%, and 0.7% respectively. As the best-performing S&P sector on the day, financial-related ETFs attracted plenty of investor attention. Volume in the flagship Financial Selector SPDR Fund (XLF) surged to 95.14M, well-above its 3 month average of 74.59M, and gained 1.19%. XLF's 14% ascent since Election Day, has been fueled by expectations of tax cuts, regulatory relief, and rising interest rates to be ushered in by a Trump administration.
Similarly, the energy sector has been on an upward trajectory since Election Day, on the prospects of a rollback in environmental regulations, increased infrastructure spending and protective, domestic policy stances by our incoming administration. This in conjunction with the recent OPEC production cut agreement has buoyed energy ETFs in recent market action, including the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), which added 2.0% on Monday to its industry best 38.0% YTD gain. The rising momentum in the energy sector has spurred some changes atop our Quant leaderboard, where the VanEck Vectors Oil Services ETF (OIH) claims our highest Quant ranking. With a perfect 10 Green Diamond Reward Rating, OIH may be worth taking a look at for those looking to capture upside potential in the energy sector.
While the broader European market was able to endure the shock of the Italian referendum, with the iShares MSCI Eurozone ETF (EZU) gaining 2.20% on the day, it was widely expected that Italian stocks would suffer in wake of a defeat. However, the performance of Italian equity ETFs defied this prevailing wisdom. Despite having its largest sector weighting towards Italy's ailing financial sector, at 28.2%, the iShares MSCI Italy Capped ETF (EWI) closed the day up 0.81%. Although Italian and European equities rebounded Monday, the potential fallout of Italy's referendum is unknown and will continue to unnerve investors as uncertainty over the stability of the EU hangs over the markets.
Looking to the week ahead, all eyes will turn to the Federal Reserve's December 13-14 meeting, in which they are widely expected to increase short-term rates.
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