ECB DISAPPOINTS MARKETS -- EURO JUMPS AS DOLLAR FALLS -- TREASURY YIELDS FOLLOW EUROPE HIGHER -- EUROPEAN STOCKS TUMBLE -- RISING RATES HURT UTILITIES, SUPPORT BANKS -- KROGER BREAKS OUT TO NEW HIGH -- ENERGY SECTOR WEAKENS -- S&P 500 RETESTS 200-DAY LINE
DRAGHI DISAPPOINTS... Mario Draghi promised more stimulative measures to boost eurozone inflation and economic growth. The ECB today lowered its deposit rate 10 basis points to -0.3%. It also extended its QE bond buying program for an additional six months. Either those moves were already expected, or the markets expected more. Either way, the reaction has been negative. The Euro, which has been falling in expectation of a more aggressive move, is jumping sharply. Chart 1 shows the Euro jumping more than 2% off chart support along its spring lows. That is pushing the dollar sharply lower. Chart 2 shows the PowerShares Dollar Index Fund (UUP) gapping sharply lower. [The dollar drop is giving a modest boost to gold and gold miners]. Bond yields also jumped in Europe as bonds sold off. [The German 2-year yield jumped 10 basis points]. Higher eurozone yields are boosting Treasury yields here. European stocks are reacting badly to the jump in the Euro and bond yields. U.S. stocks are reacting negatively as well.
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Chart 1
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Chart 2
TREASURY YIELDS JUMP... I recently wrote about how low eurozone yields were helping keep Treasury yields down. Today, eurozone yields are pulling Treasury yields higher. Eurozone bond yields are jumping along with the Euro on disappointment over today's ECB announcement. Chart 3 shows the 10-Year Treasury Note Yield bouncing sharply off its moving average lines. That's the biggest jump in a month and is pushing bond prices lower. Chart 4 shows the Barclays 20+Year Treasury Bond iShares (TLT) falling back below their moving average lines.
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Chart 3
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Chart 4
EUROPEAN STOCKS DROP ... Chart 5 shows the London FTSE falling 2%. British shares are also being negatively impacted by weak energy prices. Losses on the continent are closer to -3%. Chart 6 shows the Dow Jones Germany Stock Index falling back below its 200 average. Chart 7 shows the Dow Jones France Stock Index doing the same. Eurozone stocks were being supported by a weaker Euro and very low interest rates. A rising Euro, along with higher bond yields, are pulling euzozone stocks lower today. That's also having a negative impact on U.S. stocks.
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Chart 5
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Chart 6
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Chart 7
RISING RATES HURT UTILITIES, SUPPORT BANKS... Today's big jump in bond yields is having a predictable effect on rate sensitive market sectors. Rising rates hurt utilities. Chart 8 shows the Utilities Sector SPDR (XLU) falling to a three-month low today. [REITS are down for the same reason]. Rising rates usually help banks. Chart 9 shows the KBW Bank SPDR (KBE) trading within a small consolidation pattern in a rising trend.
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Chart 8
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Chart 9
KROGER BREAKS OUT... Defensive consumer staples are also holding up today. That's partially due to continued buying in food-related stocks. I recently showed upside breakouts in Campbell Soup, Hormel, and Tyson Foods. Here's another. Chart 10 shows Kroger (KR) breaking out of a nine-month holding pattern to record a new high. Kroger is the biggest supermarket operator in the country. It just reported higher earnings due largely to lower costs. I recently suggested that falling grain and feed costs might giving a boost to food stocks. That may also be the case with Kroger.
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Chart 10
ENERGY SHARES WEAKEN... The daily bars in Chart 11 show the Energy SPDR (XLE) slipping below its 50-day average for the first time in two months. Its relative strength ratio (dashed line) is slipping as well. That's a potential negative for the stock market. WTIC crude is testing support at $40, while brent crude hit a six-year low yesterday. Crude is getting a slight lift today from a falling dollar, but still remains in jeopardy. Airline stocks have benefited from a weak energy sector.
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Chart 11
S&P 500 WEAKENS... U.S. stocks are continuing the short-term selling that started yesterday afternoon. The candlevolume bars in Chart 12 show the S&P 500 falling back to its 200-day average. "Candlevolume" bars are candlesticks adjusted for volume. The heavier the volume, the wider the bar. Note the wide red candlevolume bar on yesterday's downside reversal. That's a caution sign. So is the fact that its daily MACD lines (below chart) still haven't turned positive. The S&P 500 Equal Weight ETF (RSP) fell back below its 200-day line yesterday. An SPX close below that support line would be another setback. The key to the SPX uptrend, however, is its ability to stay above its November low and its September peak near 2020 (see horizontal line).
