FOREIGN STOCKS LEAD US STOCKS LOWER -- EUROPE ETFS TUMBLE -- TEN-YEAR TREASURY YIELD FALLS TO FOUR-YEAR LOW -- FALLING FOREIGN CURRENCIES BOOST DOLLAR -- BOUNCING DOLLAR HURTS OIL, WHILE FALLING YIELDS BOOST GOLD -- BANK STOCKS LEAD U.S. STOCKS LOWER
FOREIGN SHARES TUMBLE... Foreign shares continue to fall sharply and are pulling U.S. shares lower. The biggest drops are being seen in developed markets. Chart 1 shows MSCI iShares (EFA) falling to the lowest level in early three months. The biggest losses are being seen in Europe and Japan. Chart 2 shows Europe iShares (IEV) also at a four-month low. Japanese stocks are down 485 points (-3%). Part of the Japanese selling is the result of a surge in the Japanese yen to the highest level in two years versus the dollar. Emerging markets are also selling off. Hong Kong shares are down -2%. Naturally, those losses are spilling over to U.S. stocks. The plunge in global bond yields continues which is pulling money into the relative safety of government bonds. The drop in yields has increased fears about the state of the global economy.
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Chart 1
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Chart 2
TREASURY YIELD TUMBLES TO FOUR-YEAR LOW... Chart 4 shows the 10-Year Treasury Yield falling to a four year low at 1.52%. Treasury yields are being pulled lower by record lows in developed markets all over the world. The German 10-year maturity has fallen into negative territory for the first time in history. The extraordinary plunge in global bond yields is a vote of no confidence in the global economy. As is normally the case, that leads to higher bond prices and lower stock prices. While that may benefit defensive stock groups that pay dividends (like staples and utilities), it's bad for financial shares and banks in particular. Traditional safe havens like gold and the yen are rising today. Economically-sensitive commodities like copper and oil (along with their respective shares) are down. The bouncing dollar has a lot to do with that.
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Chart 3
FALLING EURO AND STERLING BOOST DOLLAR... The flight out of most foreign currencies continues to boost the U.S. dollar. Chart 5 shows the PowerShares Dollar Bullish Fund (UUP) trading at two-week high today. A lot of that gain is coming against European currencies. Chart 5 shows the British Pound falling to a two-month low (on Brexit fears). That's also hurting the Euro. Chart 6 shows the Euro bearing down on its May low and 200-day average. Commodity currencies in Australia and Canada are also falling along with most commodity markets. The rising dollar may also be exerting downside pressure on large cap stocks in the U.S. that dependn on export business.
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Chart 4
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Chart 5
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Chart 6
OIL FALLS WHILE GOLD SURGES... My weekend message suggested that the price of crude oil was up against chart resistance and due for a pullback. That appears to be happening. Chart 7 shows the United States Oil Fund (USO) down -2% today. It's fallen back below its 200-day average and threatening to break its 50-day. The 14-day RSI (top of chart) has fallen below the 50 line for the first time in more than two months. That's why energy stocks are among today's biggest losers. By contrast, gold prices are soaring. Chart 8 shows the Gold SPDR (GLD) surging the equivalent of $17 (1.3%) to the highest level since early 2015. Gold shares are also rising. Gold is rallying in the face of a bouncing dollar for two reasons. Falling bond yields are bullish for gold (which is a non-yielding asset). Gold is also being bought as a hedge against falling global stocks.
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Chart 7
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Chart 8
BANK SHARES LEAD MARKET LOWER... Falling bond yields are especially hard on financial stocks, and banks in particular. Bank shares in Europe are leading those stock markets lower. The same is true in the states. Chart 9 shows the KBW Bank Index ($BKX) falling below its May low to a two-month low. They're also showing relative weakness. The KBW/SPX ratio (solid line) has been dropping all month and is also at a two-month low. U.S. stocks are also falling, but not as much as foreign shares. Chart 10 shows the S&P 500 falling below its 50-day average. My weekend message suggested a possible drop to its May low and/or its 200-day moving average. That still appears to be a likely scenario. The unusually dovish comments from the Fed on Wednesday showed a lot more pessimism on the U.S. economy. There also appears to be a growing fear that central banks are losing their ability to boost global stocks or economies. The June 23 British Bexit vote is also causing a lot of global volatility. At least we'll know how that turns out a week from today.
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Chart 9
