European equities rose 1.1% in thin holiday trading, with cyclicals outperforming defensives as the broader tone stayed risk-on. Small caps led large caps, and growth outpaced value. Moves were also linked to peace talks and oil prices, while a reversal in long-end yields that began last week provided an additional tailwind.
In the US, futures pointed to an opening gain of about 0.7%, and Asian markets traded higher overall, with South Korea’s Kospi leading the advance. Within Korean equities, SK Hynix rebounded 7% and Samsung gained 3%, following a brief pause last week in the semiconductor trade.
Persistent Risk-On Sentiment Driven by Falling Yields
We are seeing a persistent risk-on tone in equities, driven partly by a notable reversal in long-end bond yields that started last week. This environment favors cyclicals, small caps, and growth stocks over more defensive plays. The market is rewarding risk, a trend we expect to continue in the near term.
The recent drop in the US 10-year Treasury yield, which has pulled back from over 4.7% to around 4.4% this month, is a key catalyst for this move. This easing of yields reduces the discount rate on future earnings, making growth stocks with long-term profit horizons appear more attractive. We believe this provides a supportive backdrop for technology and other growth-oriented sectors.
Rotation Into Growth and Technology, Semiconductors Outperform
This rotation is already visible in market performance, with the Nasdaq 100 gaining nearly 4% in May, outpacing the S&P 500’s 2.5% rise. For traders, this suggests that bullish positions on growth indices may be opportune. We are considering strategies like buying call options or bull call spreads on ETFs like QQQ to gain leveraged exposure to this trend.
The semiconductor trade, highlighted by recent strength in Asian markets, is a prime example of this renewed momentum. After a brief pause, the demand for chips tied to artificial intelligence continues to be a powerful narrative, pushing the sector higher. Given this, we are looking at near-term call options on major semiconductor ETFs or individual high-beta names within the sector.
Historically, periods of falling yields have often coincided with strong performance for growth equities, similar to what we observed in late 2020. Furthermore, the CBOE Volatility Index (VIX) has recently dipped below 14, its lowest point in several months. This cheaper implied volatility makes it a more cost-effective time to purchase options to express a bullish view.
