STRONG JOBS REPORT PUSHES INTEREST RATES SHARPLY HIGHER AND TREASURY BONDS LOWER -- HIGHER RATES BOOST BANKS AND BROKERS -- BUT HURT UTILITIES AND GOLD -- S&P 500 ENDS DAY LOWER...
SOUND FAMILIAR? ... The above headline is actually taken from my February 7 Market Message which was written the day after that Friday's strong jobs report. Yesterday's surprisingly strong jobs report, and market reactions, were almost exactly the same as they were a month ago. It just goes to show that history can repeat itself. The reason I'm repeating that earlier headline is also to show that intermarket trends also played out in a similar -- and predictable -- manner yesterday. A sharp jump in U.S. Treasury yields pushed bond prices sharply lower and rate sensitive stocks with them. The two weakest sectors were dividend-paying utilities and REITS. Gold stocks tumbled with the metal on a combination of rising bond yields and a surge in the dollar to a new eleven-year high. The surging dollar pushed most other commodities lower as well. Banks and brokers jumped on Friday -- just as they did a month ago. Those groups usually benefit from rising rates. U.S. stocks sold off sharply in heavy trading. Utilities were the hardest hit. Chart 1 shows the Dow Jones Utility Average losing 3% and falling below its 200-day moving average for the first time in a year. And it did so on rising volume. Since utilities are closely tied to bond prices, they stand to lose the most when bond prices fall and yields jump. That breakdown in utilities also suggests that the threat of rising rates is being taken very seriously by traders.
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Chart 1
10-YEAR T-NOTE YIELD HITS NEW 2015 HIGH... Not surprisingly, the unusually strong jobs report pushed bond yields sharply higher (and bond prices lower). Chart 1 shows the 10-Year U.S. Treasury Yield jumping to 2.24% on Friday which puts it at the highest level since last December. The yield has also broken a resistance line drawn over its September/December highs. To signal a major turn to the upside, however, the yield would have to clear the higher resistance line extending back to the start of 2014. But it may be heading in that direction. It's also worth noting that the green line turned up at the start of February at the same level as it did in the spring of 2013. That gives more technical credibility to the recent upturn. The upturn in shorter-term yields is even more impressive.
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Chart 2
TWO-YEAR YIELD NEARS FOUR-YEAR HIGH... The reason yields jumped so sharply on Friday is that the strong jobs report increases the odds for a Fed rate hike later this year. Shorter-term yields are more sensitive to Fed rate hikes than longer term maturities. That may explain why shorter-term rates have risen faster than long-term rates (on a percentage basis) since the start of the year. We saw that again yesterday. Chart 3 shows the 2-Year Treasury Yield climbing the equivalent of 12% on Friday to close just shy of a new four-year high. [The 10-Year yield climbed the equivalent of 6%, only half as much]. That suggests that traders are taking the threat of a Fed rate hike more seriously. Higher rates hurt rate dividend-paying groups like utilities and REITS (and non-yielding precious metals), but help financial stocks like banks, brokers, and insurers.
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Chart 3
DOLLAR SOARS AS EURO TUMBLES... Another side-effect of rising U.S. rates is a strong dollar. That's even more true when foreign rates are falling. Thursday's ECB announcement of the start of its quantitative easing bond-buying program on Monday sent European yields lower on the week. That pushed the Euro to the lowest level in eleven-years against the dollar. Friday's strong jobs report in the U.S. pushed the U.S. Dollar Index (green bars) to one of its biggest advances of the year, and the Euro sharply lower. Forex traders are now talking about the Euro (currently at 108.43) falling to parity with the dollar. While eurozone QE is bad for the Euro, it's good for that region's stocks. That may explain why European stocks had a relatively good week. The Dow Jones STOXX Europe 600 Index ended the week at a new seven-year high. Foreign stock ETFs that are quoted in U.S. dollars, however, ended the week on the downside -- both emerging and developed.
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Chart 4
EAFE ISHARES FALL BACK BELOW 200-DAY LINE... Chart 5 shows EAFE iShares falling back below its 200-day average on Friday in heavier trading. [EAFE stand for Europe Australasia and the Far East]. The EAFE is also in danger of falling below its late November peak (63.91). That would be a setback to its attempt to start a new uptrend. Some of the biggest Friday losers were in Europe -- France, Germany, Italy, Spain, and the UK. A lot of that weakness was the result of the surge in the dollar and weakness in sterling and the Euro. Foreign stock ETFs are quoted in U.S. dollars and get hurt by falling foreign currencies. [Which is why investors have to hedge out currency risk on foreign purchases]. A weaker yen pushed Japanese iShares (EWJ) lower on Friday despite a new 15-year high in the Nikkei Index. Emerging markets were hit even harder by the rising dollar.
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Chart 5
FALLING EMERGING CURRENCIES LEAD STOCKS LOWER... Emerging markets are getting hit harder on a number of fronts. Rising rates in the U.S. hurt the appeal of higher-yielding but riskier emerging market assets. A rising dollar pushes emerging currencies lower which weighs on their stocks. Lower commodity prices (resulting from a strong dollar) hurt emerging exporters like Brazil and Russia. Economic weakness in China (the largest emerging market) also reduces demand for global commodities. Weak commodity prices, along with a rising dollar and rising U.S. rates, are a bad combination for emerging markets. And that's being reflected in their weaker stock performance. The red bars in Chart 6 shows Emerging Markets iShares (EEM) falling below their (blue) 50-day average on Friday. That puts the EEM in danger of falling below its late January low. The falling green line is the Wisdom Tree Emerging Currency Fund (CEW) which is in danger of falling to the lowest level in six years. Some of the hardest hit currencies are in Brazil, Turkey, and Russia. The Chinese yuan has also been falling. That puts pressure on foreign central banks to raise interest rates to support their currencies. That's not good for their economies or their stocks. Falling currencies also reduce the appeal of emerging market stocks to foreign investors.
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Chart 6
GOLD TUMBLES ON RISING RATES ... Gold got hit hard Friday on two fronts. One was the sharp jump in U.S. interest rates. The other was the surge in the U.S. Dollar to the highest level in eleven years. Chart 7 shows the price of gold tumbling $29 (-2.4%) on Friday to the lowest level for the year. And it did so on rising volume. [Gold stocks lost -7.4% and were day's and week's biggest losers]. The green line is the 2-year Treasury yield. The chart shows gold trending inversely to the 2-year yield. That's been especially noticeable since the start of the year. A peak in the yield line at the start of the year helped push gold into a strong January. The upturn in the green line since late January has helped push gold (and gold shares) sharply lower. There are at least two reasons why. Gold is a non-yielding asset. It has more appeal when U.S. rates are low or declining. It loses its appeal when rates start rising -- as they are now. The second reason is that rising rates push the dollar higher which is also bad for gold. Gold is priced in dollars, as are all other commodities. The surging dollar is a main reason why commodity markets in general are doing so badly.
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Chart 7
TRANSPORTS LEAD INDUSTRIALS LOWER ... Wednesday's message showed the negative divergence between the weaker Dow Transports and the stronger Dow Industrials. That negative divergence occurred when the February transportation rally fell short of its fourth quarter high (see falling trendline in Chart 8). That failed to confirm a record high in the Dow Industrials and warned of a market pullback. On Friday, the TRAN fell below its (blue) 50-day average and is now in danger of falling closer to its 200-day line. Chart 9 shows the Dow Industrials tumbling 278 points (-1.5%) on Friday in heavy trading. It too is now in danger of breaking its 50-day line. It's doubtful that the threat of rising rates is sufficient to sidetrack the market's major uptrend. Especially since rising rates are the result of stronger economic news (with low inflation). But it may be enough to cause an over-extended U.S. rally to take a breather. It is certainly enough to cause some sector stock rotations out of stocks that would get hurt from rising rates and into those that would benefit.
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Chart 8
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Chart 9
APPLE LOOKS OVERBOUGHT ... Apple has the biggest market capitalization in the world. It's also the biggest stock in the Nasdaq market (10%) which has just reached the 5000 level for the first time in fifteen years. That makes me a little nervous. So does this week's announcement that Apple is replacing AT&T in the Dow Jones Industrial Average. Given Apple's high price, that gives the stock a big say in the direction of the Dow (which is a price-weighted index). And then there's its price chart. The weekly bars in Chart 10 show Apple ending the week slightly off its record high of 133. What concerns me is that its 14-week RSI line is still well below its fourth quarter peak, and has failed to confirm the stock's move to a new record. That constitutes a potential "negative divergence" between the weaker RSI line and the stronger stock. The last negative divergence like that occurred during 2012 which led to a serious setback in the stock. I'm not predicting anything like that. But Chart 10 does suggest that Apple is overbought and in need of some type of consolidation or pullback. That wouldn't help the short-term outlook for the Nasdaq or the Dow.
