STOCKS AND BONDS RALLY ON FED ANNOUNCEMENT -- PULLBACK IN YIELDS BOOSTS REITS AND UTILITIES, WHILE BANKS LAG -- DOLLAR DROP BOOSTS GOLD -- STOCK INDEXES REACT POSITIVELY -- EMERGING MARKETS LEAD FOREIGN STOCK ETFS HIGHER
FED MOVE VIEWED AS DOVISH... The Fed hiked rates today as expected, with expectations for two more hikes this year. Judging from immediate market reactions, the Fed announcement is being viewed as somewhat dovish. For one thing, bond yields are dropping. Chart 1 shows the 10-Year Treasury Yield falling sharply. With yields falling, bond prices are having a strong day. Junk bonds, which have been correcting lately, are especially strong. That's also positive for stocks. Rate sensitive stock groups like utilities and REITs are leading a strong market response. Falling yields, however, are weighing on bank stocks. The dollar is also dropping. Chart 2 shows the PowerShares Dollar Index ETF (UUP) falling to a two-week low. That's giving a boost to commodities, and gold in particular. Chart 3 shows Gold Shares SPDR (GLD) jumping sharply, as are gold miners. Energy stocks and crude oil are also having a strong day, as are materials stocks in general.
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Chart 1
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Chart 2
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Chart 3
STOCKS REBOUND... Stocks are reacting positively to today's Fed announcement. Chart 4 shows the S&P 500 Index trading at a two-week high after bouncing off its 20-day average. Smaller stocks are doing even better. Chart 5 shows the S&P 600 Small Cap Index 500 climbing nearly twice as much as the SPX. SML is bouncing off chart support along its 2017 lows and is trying to regain its 50-day line. Relative weakness in small caps has been a minor concern of late. Not today.
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Chart 4
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Chart 5
EMERGING MARKETS SURGE... Foreign stock ETFs are also rallying. That's especially true of emerging markets which are especially sensitive to the direction of bond yields and the dollar. Chart 6 shows Emerging Markets iShares (EEM) surging 2.5% to a twenty-month high. That's twice as much as EAFE iShares (EFA) of foreign developed markets which are also hitting new recovery highs. All of these moves are, of course, are initial market reactions. We'll let things run their course today and take another look later in the week. Those initial reactions, however, are decidedly positive.
