PLUNGE IN GLOBAL BOND YIELDS SPARKS FLIGHT TO SAFETY -- RECORD LOW FOREIGN YIELDS PULL 10-YEAR TREASURY YIELD TO THREE-YEAR LOW -- BREXIT FEARS HIT POUND AND EUROPE -- OVERBOUGHT OIL MARKET DUE FOR A PULLBACK -- SO IS THE S&P 500
FALLING FOREIGN YIELDS PULL TREASURIES LOWER... The big story this week was the plunge in global bond yields, many of which fell to record lows and deeper into negative territory. Chart 1 compares 10-Year yields of the U.S. (green), Britain (red), Germany (blue), and Japan (orange). The last three hit record lows this week. That pulled the 10-Year Treasury yield to its lowest close in three years. It's clear from the chart that Treasuries are the best place to be in the global search for yield. Buying of Treasuries by foreigners (which hit a record high this week) is pushing prices higher and yields lower. In other words, Treasury yields are being pulled lower by foreign influences. The Japanese 10-year yield ended the week deeper into negative territory (-0.14%), while the German 10-year yield is only two basis points (0.02%) from turning negative. The British 10-year yield ended at a record low of 1.23%. All are lower than the 1.64% yield offered by Treasuries. The flight to safety into global bonds may have also contributed to profit-taking in global stocks at week's end. That was especially evident in Europe which is concerned about growing fears of a British BREXIT from the European Union. A plunge in the British Pound reflected that growing fear.
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Chart 1
BRITISH POUND TUMBLES ... Chart 2 shows the British Pound tumbling to a two-month low on Friday. Latest polls show that British voters favoring an "exit" from the European Union on June 23 hold a ten-point lead. That may have contributed to some late week selling in British stocks. Chart 3 shows the London Financial Times Index (FTSE) losing -1.8% on Friday which pushed it back below its moving average lines. A further drop below its May low would be another technical setback for British stocks. A broader measure of European stocks did even worse.
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Chart 2
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Chart 3
STOXX EUROPE 600 INDEX FALLS EVEN MORE... Chart 4 shows the STOXX Europe 600 Index losing -2.4% on Friday and falling back below its (blue) 50-day average. The index had just failed a test of its 200-day average. [The STOXX600 includes stocks from 18 European countries, which include the UK]. There again, a drop below its May low would turn its short-term trend lower. German and French stocks lost -2.5% and 2.2% respectively on Friday and show similar weakness. Chart 5 shows the German DAX Index (the biggest economy in Europe) forming two "declining tops" between April and May which hint at a weakening trend. Selling in Europe most likely contributed to Friday selling in the states. So did a bouncing dollar and a drop in the price of oil.
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Chart 4
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Chart 5
OVERBOUGHT OIL MARKET DUE FOR PROFIT-TAKING... Another contributing factor to Friday's selling in the states was a 3% drop in the price of Crude Oil ($WTIC). [Energy stocks, which were the week's strongest sector, lost more than -2% on Friday to lead the market lower]. Chart 6 shows a couple of technical reasons why crude is due for some profit-taking. First, its 14-day RSI line (top of chart) is pulling back from overbought territory at 70 (see arrow). Second, and more important, the price of $WTIC has reached an important resistance level at its peak formed last October near $51 (see circles). Those two factors suggest that the price of oil (which has nearly doubled since its February bottom) is vulnerable to some short-term profit-taking. Its main trend still looks bullish, and I suspect that any pullback would be part of a bottoming process. The bouncing dollar on Friday also contributed to some commodity selling (although most of that gain came against the pound). The dollar rebound may have also contributed to profit-taking in large cap stocks that depend on exports.
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Chart 6
OVERBOUGHT S&P 500 ALSO DUE FOR A PULLBACK ... The daily chart of the S&P 500 also suggests vulnerability to more short term selling. Chart 7 shows the SPX trading above its April high at 2111 at mid-week. But it wasn't able to hold that modest upside breakout. The SPX lost nearly 1% on Friday to end the week back below 2100 (2096). And it did so on rising volume. More importanty, its 14-day RSI line (top of chart) failed to reach its April high near 70 which formed a "negative divergence" in the RSI line (black arrow). Daily MACD lines (below chart) are also well below their April high. All of which suggests that the SPX may be due for some more profit-taking. A pullback near its May low (and 200-day average) wouldn't be surprising and wouldn't disturb the uptrend that started in February. The S&P 500 has had a nearly 90% correlation with the rising price of oil since their February bottom. A pullack in that commodity (which appears likely) could also weaken the S&P 500 over the short run. So could a further bounce in the U.S. dollar.
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Chart 7
FALLING YIELDS HELP DIVIDEND-PAYERS, BUT HURT FINANCIALS ... The drop in bond yields is giving an added boost to dividend-paying stocks like staples, utilities, telecom, and REITS. Several of those stock groups also are defensive in nature and attract money when investors are nervous about market direction. Financial stocks were the week's worst performers. Banks and life insurers were among the week's worst stock groups. That's because they suffer when bond yields drop. Falling global bond yields make the search for yield even harder. One of the few places it can be found is in dividend paying stocks. Not surprisingly, that group of stocks is doing pretty well. Chart 8 shows the Select Dividend iShares (DVY) hitting a record high this week, as did its relative strength ratio (top of chart). The DVY consists of stocks which show a consistent history of paying dividends. It's biggest holdings are in utilities which also hit new highs this week.
