FED DROPS PATIENT STANCE, BUT LOWERS GUIDANCE FOR FUTURE RATE HIKES -- STOCKS SURGE AS YIELDS TUMBLE -- RATE SENSITIVE STOCKS LIKE UTILITIES JUMP WITH BONDS, BUT BANKS LAG -- WEAKER DOLLAR BOOSTS COMMODITIES
FED TAKES MORE DOVISH TONE... Today's Fed statement dropped its "patient" stance, but lowered guidance for any future rate hikes. Ms. Yellen emphasized that while the Fed was dropping the word "patient", it wouldn't be "impatient" to raise rates. A slower economy, the strong dollar, and low commodity inflation contributed to the Fed's more dovish stance. Bond and stock prices reacted very positively. Stocks surged along with bond prices. Bond yields tumbled along the yield curve. That pulled the dollar lower and gave a big boost to commodity prices. Energy stocks jumped on an upturn in oil. Gold prices (and stocks) also jumped on the weaker dollar and the reduced threat of higher rates. Interest-sensitive stock groups like homebuilders, utilities, and REITs were among the day's leaders and rallied with bond prices. Banks, however, were hurt by the drop in yields. Foreign stock ETFs also rebounded with emerging markets scoring the biggest gains. Chart 1 and 2 show the DJ Industrial SPDR (DIA) and the S&P 500 SPDRs jumping more than 1% in rising volume. Both are well above their 50-day averages. Chart 3 shows the Russell 2000 iShares closing at a new record high. It's normally a good sign when small caps hit new highs first.
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Chart 1
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Chart 2
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Chart 3
BOND PRICES SURGE ON YIELD DROP ... 10-Year Treasury yields tumbled ten basis points this afternoon to 1.95%, which is the lowest close in more than a month. When bond yields fall, bond prices rise. And that's what they did. Chart 4 shows the 7-10 Year Treasury Bond iShares (IEF) surging more than one percent to reach the highest level since early February. All bond categories jumped. That gave a big boost to interest sensitive stocks like homebuilders, REITS, and utilities. Chart 5 shows the Utilities Sector SPDR (XLU) surging 2.7%. Banks didn't participate in the rally. Chart 6 shows the KBW Bank SPDR (KBE) losing ground. Banks were held back by lower rates.
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Chart 4
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Chart 5
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Chart 6
FALLING DOLLAR BOOSTS GOLD... The plunge in U.S. interest rates pulled the dollar lower today in heavy trading as shown by a 1.8% drop in the PowerShares Dollar Bullish Fund (UUP) in Chart 7. That gave a boost to commodity prices which ended the day higher. Chart 8 shows the Gold SPDR (GLD) bouncing $21 (+1.9%) off its November low. Gold benefits from a weaker dollar and lower interest rates. Gold and energy stocks were among the day's biggest winners.
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Chart 7
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Chart 8
FOREIGN STOCK ETFS ALSO JUMP SHARPLY ... Foreign stock ETFs also had a very strong reaction to the Fed's more dovish tone. Chart 9 shows EAFE iShares (EFA) jumping more than 2% in heavier trade. That pushed the EFA back above its 200-day average. Emerging markets did even better on a percentage basis (+2.4%). Chart 10 shows Emerging Markets iShares (EEM) jumping back above its 50-day average. Commodity-related markets in Brazil and Russia led the emerging market rally. Foreign stock ETFs are priced in dollars and got a big boost from the falling greenback.
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Chart 9
