EUROPEAN MARKETS LEAD STOCK BOUNCE -- EUROPEAN STOCK INDEX TESTS FEBRUARY LOW -- YIELD ON BRITISH BOND FALLS BELOW 1% -- 10 YEAR TREASURY YIELD MAY TEST 2012 BOTTOM -- EURO DROP IS ALSO BOOSTING DOLLAR
EUROPEAN STOCKS LEAD GLOBAL BOUNCE ... A rebound in European stocks is leading a rebound in the states. Chart 1 shows the Dow Jones Europe Ex UK Index climbing 2.5%. France and Germany are up a similar amount. What may be significant from a charting standpoint is that the index is testing chart support formed at its February bottom. Europe has a lot of work to do to repair chart damage done over the prior two days. But today's rebound could be a start. British shares are also trading higher (as is the British Pound). Chart 2 shows the London's FTSE 100 Index jumping 2.6% today. It's trying to climb back above its 200-day average. The relatively stronger FTSE 100 chart is misleading. That index is made up of large cap British stocks with international exposure that depend on exports. As a result, they've been supported by the recent plunge in sterling. The FTSE 250, which is composed of midsize British stocks with a more domestic basis, have fallen twice as far as the FTSE 100. That's where the real damage in Britain has been seen.
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Chart 1
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Chart 2
BRITISH 10-YEAR YIELD FALLS BELOW 1% FOR FIRST TIME IN HISTORY... Yesterday's safe haven buying of sovereign bonds pushed the 10-Year British yield below one percent for the first time in history. As has been the case for several months, plunging foreign yields are pulling Treasury yields lower. The 10-Year Treasury yield is trading at 1.46% this morning which is the lowest yield in four years. The previous record low was set in July 2012 at 1.40%. It remains to be seen of those 2012 lows will hold.
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Chart 3
FALLING EURO ALSO BOOSTS DOLLAR... While most recent forex attention has been on the plunging British Pound, the Euro is also falling. Chart 4 shows the Euro falling to a three-month low over the last three trading days. It has also fallen below its 200-day average and a rising trendline drawn under its December/March low. The Euro loss of 3% since last Friday is much smaller than the pound's drop of more than 10%. The Euro, however, accounts for 57% of the Dollar Index versus a much smaller weight of 12% for sterling. Chart 5 shows the PowerShares Dollar Index Bullish Fund (UUP) climbing to a three-month high and testing its 200-day average. A 4% jump in the yen since last Friday has held the UUP back. The yen has a slightly bigger impact (13.6%) on the UUP than the pound. A rising dollar presents some problems of its own, which include weaker commodity prices. A stronger dollar can also hurt large U.S. multinational firms that depend on exports.
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Chart 4
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Chart 5
BROKERS AND INSURERS ARE ALSO FALLING... Banks aren't the only financial stocks under pressure from plunging bond yields. Chart 6 shows the U.S. Broker-Dealers iShares (IAI) trading at the lowest level in four months (as are banks). Chart 7 shows U.S. Insurance iShares (IAK) in a similar situation. Their 14-day RSI lines (below each chart) have reached oversold territory at 30 suggesting that the decline may be getting overdone. That's usually not enough, however, to signal a bottom. A glance back at the February bottom on both charts shows that it usually takes two RSI moves into oversold territory to signal a bottom (green arrows). That suggests that we be getting close, but aren't there yet. In all three cases, however, the main culprit is the plunge in Treasury yields. Financial stocks need higher interest rates to boost profits. That being the case, financial stocks may remain under pressure until global bond yields show some signs of stabilization.
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Chart 6
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Chart 7
S&P 500 BOUNCES FROM INITIAL SUPPORT ... Short-term chart damage has certainly be done to U.S. stock indexes. Yesterday's drop saw the S&P 500 fall below its May low and 200-day average after two days of heavy trading. So far, however, the damage has been much smaller than that suffered at the start of the year. The three green lines in Chart 8 mark Fibonacci percentage retracement levels measured from the February bottom to its June peak. The SPX is bouncing slightly off its 38% retracement line today which is usually the first line of potential support. If that doesn't hold, a more important support line resides at the 50% retracement line. A drop to that level would also probably put it in enough of oversold condition to prompt some new buying.
