TEN-YEAR TREASURY YIELD HITS FOUR-MONTH HIGH -- RISING TWO-YEAR YIELD SUGGESTS RATE HIKE THIS YEAR -- HIGHER RATES PUSH DOLLAR TO SEVEN-MONTH HIGH -- THE COMBINATION OF HIGHER RATES AND STRONGER DOLLAR ARE PUSHING GLOBAL STOCKS LOWER
TEN-YEAR TREASURY YIELD CLEARS 200-DAY LINE... Bond yields around the world continue to climb, led by U.S. Treasuries. Chart 1 shows the 10-Year Treasury Yield ($TNX) climbing 4 basis points to 1.76% which is the highest level in four months. The TNX has also moved above its 200-day average (red line) for the first time this year. While all sovereign government bonds have lost ground over the last three months, Treasuries have lost the most. That's mainly due to increased expectations for a Fed rate hike this December. Those expectations have now jumped to 68%. The various markets are already pricing that in. That explains why rate-sensitive stocks have been hit so hard over the last quarter, while financials have held up better. Chart 2 shows the 2-Year Treasury yield climbing today to 0.87% which places it at a four-month high and above a falling trendline extending back to the start of the year. The 2-year yield is the most sensitive to a potential Fed hike. It's rise is also giving a big boost to the U.S. dollar. The combination of higher rates and a stronger dollar are weighing on domestic and foreign stocks (especially emerging markets).
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Chart 1
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Chart 2
DOLLAR INDEX TOUCHES SEVEN-MONTH HIGH... The jump in short-term rates is boosting the U.S. dollar. Chart 3 shows the PowerShares U.S. Dollar ETF (UUP) trading just above its July peak. A further move above that summer high would confirm that the greenback is back in an uptrend. Its longer-term chart shows the same thing. The weekly bars in Chart 4 show the UUP in a declining flag pattern since spring 2015. After bouncing off the lower support line this spring, the UUP now appears headed toward a test of its upper resistance line. The 14-week RSI (top of chart) is trading above 50; while weekly MACD lines overlaid on the chart have also turned positive. A rising dollar has negative implications for financial markets. It's already hurting commodity prices like precious metals. It could also hurt higher-yielding (and riskier) emerging markets. For another, it could have a negative impact on large U.S. multinationals which depend on export business. We're already seeing some of those negative reactions today.
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Chart 3
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Chart 4
SMALL CAPS AND LARGE CAPS ARE ROLLING OVER ... Although a rising dollar has a more negative impact on larger stocks, even small caps are falling today. Chart 5 shows the Russell 2000 Small Cap Index ($RUT) falling back below its 50-day average. A test of its September low appears likely. Large caps look even weaker. Chart 6 shows the S&P 500 Large Cap Index bearing down on its September low (and its June high). A close below that support line would signal a deeper correction. We've all been wondering what a Fed rate hike would do to the various financial markets. It's look like we're starting to find out. And it's not necessarily good. The jump in crude oil to a new high for the year may also be contributing to higher interest rates.
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Chart 5
