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LIVE MARKETS BofA sees bumpy ride for funds heavy on large caps - Reuters

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Dec 2 (Reuters) - 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

BOFA SEES BUMPY RIDE FOR FUNDS HEAVY ON LARGE CAPS (1345 ET/1845 GMT)

With Fed Chair Jerome Powell finally giving up on describing the U.S. inflation spike as "transitory", BofA Securities is warning that actively managed mutual funds may be in for a bumpy ride.

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Mutual funds are 12% underweight "pro-inflation" stocks, while 3% overweight stocks expected to fare poorly in an inflationary environment, BofA says in a new research report.

Investors for years have favored Amazon (AMZN.O), Apple (AAPL.O), Microsoft (MSFT.O) and other Big Tech companies that have consistently driven Wall Street higher. Actively managers remain overweight in those and other large stocks by 3%, and underweight smaller stocks by 43%, a balance that BofA views as risky.

During a period of inflation in the late 1960s, small caps outperformed, and they have also done better than large caps in times of stagflation, BofA says.

"We expect small caps will outperform large caps in 2022 (assuming no major resurgence in COVID): they are much less extended on valuation, are domestically oriented, and stand to benefit more from the services spending and capex recoveries," according to the report.

Small caps have seriously lagged large caps so far in 2021. The S&P 500 has gained 22% year to date, versus an 11% rise in the Russell 2000 (.RUT).

(Noel Randewich)

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BE LIKE A SCOUT AND MAKE THAT VOLATILITY PLAN (1310 ET/1810 GMT)

With U.S. equities swinging in all directions these days, DataTrek Research is out with a note advising investors to come up with a plan for even more severe volatility.

How do investors know if current market action forebodes a bigger selloff and when it's "safe(ish)" to buy US stocks?

Co-founder Nicholas Colas is watching for a one-day S&P 500 decline of 3% or more - unheard of in 2019 or early 2020, of course until Feb. 24th’s 3.4% drop.

Colas saw that as a sell signal, because along with the benchmark's move the CBOE volatility index (.VIX) closed at 25 - statistically too low. So far in 2021 we've had no 3+% down days.

Colas suggests buying on 3% down day ONLY if the VIX closes well above 44 that day, or preferably above 52.

If the VIX isn't at those levels Colas says: "it's better to be a seller on such a day than a buyer."

"Even if you don’t like this approach, consider developing a game plan for if markets get truly choppy," he says.

Colas saw Wednesday's Omicron induced sell-off as "terrible price action for the first day of the month, which often sees fresh money come into equities as asset owners rebalance portfolios." read more

He's comparing current stock prices to February 2020 around the time of the initial pandemic-related sell-off because valuations in both cases are high, indicating a market that is "ill-prepared for bad news."

With the current situation "resetting investor risk tolerances" Colas says "no one can say with certainty how the latest variant will unfold, so we need to listen to the market and respect what the price action is telling us."

Sure on Thursday the VIX was trading at just 28.5 and the S&P was up 1.4% so money mangers could potentially advise sitting tight. But Colas, sounding more in favor of the scout's motto to be prepared, says that's "pretty useless" in such a skittish market.

"We’d rather prepare for the worst," he says. "Best case, we won’t need the plan. Worst case, we’re ready."

(Sinéad Carew)

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SMART CITIES: THE TECH TIDE THAT LIFTS ALL BOATS? (1200 ET/1700 GMT)

The term "smart city" refers to a city where data and digital technology inform administration, spurring radical improvements in traffic management, power, water, waste, transportation, healthcare and security and surveillance.

Technology is the top risk in this transition, primarily due to the possibility of security and privacy breaches. One company in this sector, Chinese video surveillance provider Hikvision, even found itself on a U.S. trade blacklist.

Nevertheless, some of the world's top tech companies are offering services to help cities make the leap to being smart, including IT services giant Tech Mahindra (TEML.NS), whose chief executive and managing director - CP Gurnani - spoke to the Reuters Global Markets Forum this week.

Gurnani is incredibly bullish on smart cities and believes "the use case of 5G networks deployed for smart cities is here to stay". He added that sectors including healthcare, transportation and power can see the biggest benefits, although officials and corporate service providers need to be vigilant to be ahead of cybersecurity attacks.

Smart cities represent an opportunity lucrative enough for the company, which has a market value of over $21 billion, to pivot and orient itself towards, Gurnani told the forum.

He sees strong, symbiotic collaboration between businesses and government and consequently, robust demand for his company's offerings. Among the myriad uses of internet of things (IoT) technology, Gurnani believes the best and the most popular uses are in the area of telehealth.

A 2018 report by consultancy McKinsey reckons smart cities can trim waste, reduce emissions and boost citizens' free time by shaving as much as 30 minutes off the daily commute. More details are in their study here- https://mck.co/3oerl3V

(Aaron Saldanha)

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FIVE SESSIONS OF OMICRON AND IT'S 3% DOWN FOR EUROPE (1148 ET/1648 GMT)

We've now had 5 sessions and a week of continuous newsflow about the Omicron variant and the result is pretty grim for European equities.

The pan-European STOXX 600 has lost about over 3% since last Friday when the new strain of COVID-19 rocked global markets.

At one stage bourses on the old continent were heading towards a 2% fall but they managed to recoup some losses in afternoon trading and limited their dip today to about 1.1%.

On the bright side, so far this week, European stocks are up about 0.5%, which means that dip buyers are still running a profit from last Friday's lows.

Wall Street trading in positive territory didn't help much with so many negative headlines about the spread of infections and governments, such as Germany, implementing new social restrictions.

UK authorities, about half an hour before the close in London, announced 53,945 new COVID-19 cases, the highest daily figure since July 17.

Meanwhile new cases of Omicron continued to be announced in different countries and the EU's health agency said the variant could be responsible for more than half of all COVID-19 infections in Europe within a few months.

sd

(Julien Ponthus)

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THURSDAY DATA ASKS: WHAT DO YOU HAVE TO DO TO GET FIRED IN THIS TOWN? (1055 ET/1555 GMT)

Thursday's one-two data punch drove home the severity of the so-called 'great resignation,' in which firings (and workers) are becoming scarcer than the latest X-Box on Christmas Eve.

The number of U.S. workers filing first-time applications for unemployment benefits (USJOB=ECI) crept up to 222,000 last week, solidly undershooting the 240,000 consensus. read more

The prior week's surprise dip was revised even lower, to 194,000.

The Labor Department's report offers further evidence that employers are increasingly disinclined to hand out pink slips amid a tight labor market, the result of booming demand colliding with worker scarcity and low labor market participation.

While this latest weekly claims number - which falls outside the survey period for Friday's hotly anticipated November employment report - is within the range normally associated with healthy labor market churn, the size of the consensus miss could be cause for concern for markets.

Labor scarcity, combined with stubbornly persistent supply chain constraints, has helped erase the word "transitory" from the Fed's inflation vocabulary as wages and prices continue to rise, and could very well translate into rate hikes coming sooner and faster than many had hoped. read more

But Ian Shepherdson, chief economist at Pantheon Macroeconomics, sees the participation rate edging higher but the effects of wage inflation are likely to linger.

"The labor market ought to become a bit less tight as participation rises over the next few months," Shepherdson writes. "But businesses will still be very wary of letting people go unless they have no choice, because re-hiring will be very difficult and/or expensive.

Ongoing claims (USJOBN=ECI), reported on a one-week delay, dropped to 1.956 million, dipping below the 2 million mark for the first time since the pandemic shuttered businesses and brought the global economy to its knees.

Jobless claims

Separately, pre-announced firings at U.S. firms plunged 35% in last month to the lowest level in over 28 years.

That news comes courtesy of executive outplacement firm Challenger, Gray & Christmas, whose oft-overlooked planned layoffs report has gained growing scrutiny amid the afore-mentioned worker drought.

November's 14,875 print was the smallest number of announced firings since May, 1993. Year-to-date, layoffs have plummeted by 87% compared with last year.

"With the Omicron variant emerging and the unknowns that come with its spread, coupled with the ongoing difficulty hiring and retaining workers, it's no surprise job cuts are at record lows," said Andrew Challenger, Senior Vice President of Challenger Gray. "Employers are spread thin, planning best- and worst-case scenarios in terms of COVID, while also contending with staff shortages and high demand."

Challenger Gray

Market participants now train their gaze on tomorrow's jobs report, which is expected to show a 550,000 increase in non-farm payrolls and a 0.1 percentage point drop in the unemployment rate to 4.5%.

Wall Street was indecisive in morning trading.

S&P 500 and the Dow were solidly green, but tech kept the Nasdaq near the unchanged mark as investors favored value (.IVX) over growth (.IGX).

(Stephen Culp)

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THE "UNJUSTIFIABLE" ITALIAN DISCOUNT (1015 ET/1515 GMT)

The Omicron scare has put Milan stocks under intense selling pressure, and the argument has been that tourism-dependent economies like Italy will be hit harder by the restrictive measures put in place to fight the latest infection wave.

The critical question now is whether Italian equities' recent underperformance is justified or whether that has opened up an opportunity to chip in at a bargain.

Jefferies see a possible over-reaction here for a market that has stronger earnings momentum on the cheap. Italian stocks trade at a 37% valuation discount, the highest in 9 years.

"The recent retracement in share prices due to the Omicron scare has unjustly scarred the Milan index," they say.

"What has been missed by investors is the simply stunning turn-around in the country's current account and basic balance of payments. Moreover, there is a palpable 'feel good factor' emanating from the data," they add.

"The Milan bourse is one of the few that we cover that has consistently experienced positive earnings revisions over the past twelve and three months. We remain Bullish," they conclude.

And Carlo Franchini, head of Institutional Clients at Banca Ifigest in Milan, agrees.

"If we strip the index of the banking component, we are still basically at 2008 levels... GDP is growing at levels not seen in decades, and S&P has revised the outlook for Italy (to positive): I'd say the astral picture is perfect," he says

"I find the discount at which the MSCI Italy trades versus others is unjustifiable," he adds.

snapshot

(Danilo Masoni)

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AS BOND MARKET VOLATILITY RISES, CASH MAY NO LONGER BE TRASH (1000 ET/1500 GMT)

Wild swings in U.S. bond markets are making it more difficult to eke out profits with some trading strategies, and may be increasing the allure of holding cash.

Many large macro funds have been burned by large price swings in U.S. Treasuries as investors adjust for the prospect that the U.S. Federal Reserve will raise rates sooner than previously expected.

Repricing around this prospect has caught many investors offsides and created large daily jumps in short-dated yields, and increasingly choppy trading in longer-dated bonds and the yield curve.

“For the first time in a couple of years…cash has pretty good option value right now,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.

“Given the degree of fundamental market volatility, the massive positioning swings, what appears to be reduced dealer willingness or ability to warehouse risk, you get some surprisingly sharp moves that are not supported by changes in policy or changes in economic data, and I want to be in a position to take advantage of that. And that’s really where cash’s option value comes from,” LeBas added.

US Yield curve

(Karen Brettell)

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WHICH WAY DO WE GO? (0843 ET/1343 GMT)

U.S. equity index futures were mixed on Thursday, as equities continue to be volatile as a lack of clarity around the severity of the COVID-19 Omicron variant dominates.

Major averages on Wall Street suffered a late session meltdown on Wednesday after the confirmation of the first case in the U.S. and each closed below key technical support levels. read more

Nasdaq futures were pointed to a lower open for the tech-laden index as Apple Inc (AAPL.O) shares were down more than 3% in premarket following a Bloomberg report the company has told parts suppliers demand for its iPhone 13 lineup has slowed. read more

But the price-weighted Dow was looking at a higher open, due in part to a boost from Boeing (BA.N), which rose more than 5% before the opening bell after China's aviation authority issued an airworthiness directive on the 737 MAX that will help pave the way for the model's return to service in China after more than two-and-1/2 years. read more

Economic data showed weekly initial jobless claims rose less than expected, while layoffs fell to their lowest since 1993. read more

Below is your premarket snapshot:

Futures mixed after claims data

(Chuck Mikolajczak)

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FOR THURSDAY'S LIVE MARKETS' POSTS PRIOR TO 0830 EST/1330 GMT - CLICK HERE: read more

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Reporting By Sinéad Carew

Our Standards: The Thomson Reuters Trust Principles.

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