Global rally in cyclicals may be entering its last leg, JP Morgan cautions

The recent rise in 'cyclical' stocks versus 'defensives' may be in its last leg, strategists at JP Morgan said.

"Don’t overstay your welcome […] US CESI and bond yields are important to watch," the broker´s Mislav Matjeka said in a research report sent to clients before the start of trading in London.

Cyclical stocks worldwide had clocked in with gains of 580 basis points over the past few weeks, suggesting there were still about between 350 and 400 basis points to go, Matejka said.

Nevertheless, the strategist said he first wanted to see how upcoming prints for the ISM purchasing managers´ index and non-farm payrolls figures panned out.

Those data might confirm whether Citigroup´s Economic Surprise Index had definitively roller over after the most recent and weaker than expected reading on second quarter US gross domestic product . The US CESI tipically peaked out at around a reading of 60 points, Matejka explained.

Another risk for cyclicals came from bond yields, if they did not resume their move higher than could see the rally in cyclicals peter out sooner, he said.

"In addition to the yields and US CESI consideration, we think the Japanese stimulus announcement, UK policy action and the potentially favourable Italian Banks resolution & stress test results could signal the high water mark for the trade."