RISING DOLLAR HURTS COMMODITIES -- FALLING YEN BOOSTS JAPANESE STOCKS -- 50-DAY AVERAGE BLOCKS LOW VOLUME STOCK BOUNCE --BOND YIELDS REACH TWO-YEAR HIGH, BUT ARE STILL VERY LOW
RISING COMMODITIES KEEPS DOWNSIDE PRESSURE ON COMMODITIES... The U.S. Dollar Index has rebounded sharply over the last two weeks (see circle in Chart 1). Global turmoil has pulled money out of foreign currencies (especially emerging markets) and into the relative safety of the U.S. dollar. That's bad news for commodities, which usually drop when the dollar rises. Chart 2 shows the CRB Index falling during the second half of June to the lowest level in a year (see circle). Precious metals had an especially bad week. [A big crop report on Friday pushed corn prices sharply lower]. The yen dropped this week which boosted Japanese stocks.
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Chart 1
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Chart 2
FALLING YEN BOOSTS JAPANESE STOCKS... The Japanese yen fell along with other foreign currencies this week. Chart 3 shows the yen closing just below its 50-day moving average. The yen rally from mid-May to mid-June pulled Japanese stocks lower. This week's drop in the yen had the opposite effect. Chart 4 shows the WisdomTree Japan Hedged Equity Fund (DXJ) rebounding. The DXJ, however, remains below its 50-day line. So do U.S. stock indexes.
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Chart 3
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Chart 4
LOW-VOLUME BOUNCE STOPS AT 50-DAY LINE... U.S. stocks regained some lost ground this week. However, the short-term bounce occurred on light volume which shows lack of enthusiasm on the part of buyers. Charts 5 and 6 show the Dow Industrials and S&P 500 also backing off from their 50-day averages on Friday on higher volume (although that higher volume may have been due to quarter-end rebalancing and some stock index adjustments). The charts show a market still in the midst of a downside correction. At the very least, a more convincing stock rebound requires a decisive close above their 50-day averages (preferably on rising volume).
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Chart 5
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Chart 6
BOND YIELDS ARE STILL VERY LOW... Chart 7 shows the 10-year Treasury Note Yield ($TNX) trading at the highest level in two years. That is what's causing all of the volatility in global markets, since it suggests that the 30-year downtrend in bond yields has ended (which it probably has). Bond yields, however, are still at very low levels. Chart 8 shows the drop in the 10-year yield since 1994 when it was trading at 8%. [The yield peaked at 16% during 1981]. Chart 8 shows that the bond yield is still very low, and that the upturn has been relatively small. It's also interesting to note that the yield is way below levels that prevailed during the last housing boom that ended in 2007. That being the case, it's doubtful that the latest upturn is enough to stop the housing recovery. Chart 8 also shows that the 10-year yield is still below its 2007-2011 down trendline. It would have to reach 3% to break that resistance line and almost double to 5% to get back to where it was during 2007. So while it's true that bond yields have most likely bottomed (and bond prices have peaked), it's important to keep the recent upturn in some perspective. I suspect bond yields are adjusting to a more normal level where they would have been without so much Fed intervention. That may not be such a bad thing for stocks. While rising rates may continue to cause short-term market volatility, I believe that stocks will benefit in the long run from money flows out of fixed income investments.
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Chart 7
