TREASURY YIELDS CONTINUE TO RISE -- THAT'S HURTING UTILITIES AND OTHER DIVIDEND PAYERS -- WHILE GIVING FINANCIALS A BOOST -- RISING DOLLAR PUSHES GOLD AND MINERS SHARPLY LOWER -- BRITISH STOCKS HIT RECORD HIGHS -- BUT NOT IN DOLLAR TERMS
TREASURY YIELDS CONTINUE TO REBOUND... The continuing rebound in Treasury yields is helping some stock groups while hurting others. It's hurting dividend-paying stocks like staples, telecom, utilities, and REITs which continue to sell off. Rising rates are also boosting the dollar which is pushing gold and miners sharply lower. But they're helping financials stocks, especially banks, brokers, and life insurers. Chart 1 shows the CBOE 10-Year Treasury Yield ($TNX) jumping six basis points to 1.68% in today's trading, which pushes it well above its 50-day moving average. Rising bond yields are pushing bond prices lower (along with stocks tied to bonds). Short-term rates are rising as well. Chart 2 shows the 2-Year Treasury Yield climbing 2 basis points to 0.82%. That puts it back above its 200-day average and a falling trendline drawn over its March, May, June highs. A move above its August high at 0.84% would turn its trend higher and boost the case for higher rates. The two-year yield is more sensitive to expectations for a Fed rate hike later this year. [Rising oil prices may also be boosting Treasury yields]. Judging from the reaction of various rate-sensitive sectors, the markets have already started to price in higher rates.
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Chart 1
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Chart 2
ROTATION OUT OF UTILITIES AND INTO FINANCIALS ... I've written about the rotation out of bond proxies like utilities and into financials in recent messages. The selloff in utilities is becoming more pronounced. The red bars in Chart 3 show the Utilities SPDR (XLU) peaking in early July just as the 10-year Treasury yield (green line) bottomed. At the same time, the Financials SPDR (black bars) started rising. . Since July 1, the 10-Year yield has jump 12%. Since then, utilities have fallen -8%, REITs -5%, staples -4%, and telecom -3%. Financials meanwhile gained 5%. That's what normally happens when investors are starting to expect higher interest rates. Chart 3 also shows the Utilities SPDR (XLU) falling below its 200-day average for the first time since last December. Staples and REITs are also nearing their 200-day lines. Since these are stocks normally tied to bonds, that's a warning sign that Treasury prices may also be peaking.
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Chart 3
RISING DOLLAR PUSHES GOLD SHARPLY LOWER... Rising U.S. rates are pulling the U.S. dollar higher. Chart 4 shows the PowerShares Dollar Index (UUP) climbing to the highest level in eight weeks and very close to exceeding its 200-day moving average. The biggest casualty of a rising dollar is usually the gold market. And it certainly is that today. The bars on top of Chart 4 show gold falling to the lowest level in three months. Gold is being hurt by the prospect of higher U.S. rates and a strong dollar. And as usually happens when gold weakens, gold miners are falling even further.
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Chart 4
GOLD MINERS LEAD GOLD LOWER ... Chart 5 shows the Gold SPDR (GLD) tumbling the equivalent of $40 dollar (-3.2%) today to the lowest level since June. The GLD has also broken a rising trendline drawn under its December/May lows. The puts it on track to retest its 200-day average (red line) and maybe even its spring low. Gold miners are doing even worse. Chart 6 shows the VanEck Gold Miners ETF (GDX) falling more than 8% today and also heading toward its spring low. I pointed out at Chartcon 2016 that miners usually rise faster than bullion in an uptrend and fall faster during a downside correction. And that's been the case this year. Between January and August, gold miners outperformed bullion by a 125% to 27% margin. Since the August peak, miners have lost -72% versus a smaller bullion loss of -19%. That makes miners a good leading indicator for gold. Right now, the falling GDX/GLD ratio (top of Chart 6) shows miners leading the commodity lower.
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Chart 5
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Chart 6
FTSE HITS NEW RECORD -- BUT NOT IN DOLLAR TERMS... Currencies do matter when dealing in foreign markets. Britain is a very good example of that. The black line in Chart 7 shows the FTSE 100 Index closing at a record high today. A lot of that came as result of the falling pound which fell to another 30-year low today. Nearly three-quarters of profits in the large cap FTSE come from British exports which are helped by a plunging currency. The plunging pound, however, has hurt Americans investing in that country. The green area in Chart 7 shows MSCI United Kingdom iShares (EWU). Notice how badly the EWU has lagged behind FTSE. Since the start of the year, FTSE has gained 13%. The EWU, however, has risen barely one percent. Why is that? Because the EWU is quoted in U.S. dollars. The -13% drop in sterling this year against the dollar virtually wiped out any potential stock profit for American investors who bought British shares. That's why it's important to keep an eye on foreign currency direction when investing in a foreign market. When you buy stocks in a foreign country like Britain, you're also buying the plunging pound (see red line). Ouch!
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Chart 7
RISING RATES MAY BE WEIGHING ON STOCKS ... Stock can't seem to gain any upside traction. The black bars in Chart 8 show the S&P 500 falling back from its 50-day average. That raises the possibility of a retest of its September low and its rising trendline drawn under its February/June lows. I can't help but wonder if the recent rise in bond yields (and a stronger dollar) are taking a toll on investor optimism. A rising dollar can reduce large cap foreign earnings. Falling bond yields have supported this seven-year old stock market rally. Any hint of higher rates could put a strain on the aging bull. The green bars on top of Chart 8 show the 10-Year Treasury yield rising above a falling trendline extending back to last December. Since the two charts have been trending in opposite directions, it wouldn't be too surprising to see the S&P 500 retest its rising 2016 trendline. A negative correlation between two markets means that if one of them goes up, the other usually goes down.
