BOND YIELDS ARE JUMPING AGAIN -- THAT'S GIVING A BOOST TO FINANCIAL STOCKS -- RISING STOCK/BOND RATIO SHOWS MONEY ROTATING FROM TREASURIES INTO STOCKS -- THE MSCI ALL COUNTRY WORLD EX US ETF IS RISING FASTER THAN THE U.S.
TEN-YEAR TREASURY YIELDS IS RISING AGAIN... After a modest setback last week, global bond yields are rising again. Chart 1 shows the 10-Year Treasury Yield ($TNX) climbing four basis points today. The TNX appears headed for another test of its July/early October peaks formed near 2.40%. An eventual upside breakout appears likely. Bond yields are also rising around the world today. Canada's yield is rising 3 bps. In Europe, German bunds are up 3 bps, while gilt yields in the UK are up 4bps. The two-year Treasury yield is trading at 1.56% today which is the highest level in nine years. That's based on increased expectations for another Fed rate hike in December. One of the factors holding the Fed back has been low inflation. Rising commodity prices, however, are already hinting at higher inflation. So was yesterday's report that U.S. import prices rose 0.7% in September from the previous month. A weak dollar during 2017 has had a lot to do with that. Treasury bond prices are falling as yield rise. That's because bond prices and yields trend in opposite directions. A lot of that money coming out of bonds is moving into stocks. That's especially true of financial stocks which benefit from rising rates. Dividend paying stocks (that are also defensive in nature) like consumer staples, utilities, and REITs are lagging behind.
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Chart 1
FINANCIAL SPDR CONSOLIDATING WITHIN UPTREND... With rising bond yields, financials are the day's strongest sector. Chart 2 shows the Financial Sector SPDR (XLF) consolidating during the first half of October (see box). That's usually just a pause in a bigger uptrend. The XLF just recently cleared its 2007 high to reach a new record. The XLF/SPX relative strength ratio (top of chart) is also pausing in a strong uptrend. That's tied mainly to rising interest rates, and expectations for more to come. That's also based on expectations for a stronger economy.
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Chart 2
MONEY IS ROTATING OUT OF BONDS AND INTO STOCKS ... Chart 3 plots a ratio of the S&P 500 SPDR (SPY) divided by the 20+Year Treasury Bond iShares (TLT). [I'm using the TLT for comparison purposes because it's been the strongest part of fixed income since the start of the year]. The falling stock/bond ratio between March and early September showed stocks underperforming longer-dated Treasuries. The ratio started rising sharply during September and achieved an upside breakout near the end of that month. It has since hit a new record high. If you compare the direction of the bond/stock ratio to the 10-Year Treasury yield (in the lower box), you'll see them rising and falling together. The ratio peaked in March with the TNX, and bottomed with the TNX in September. Notice also that the September upside breakout in the SPY/TLT ratio (upper chart) followed the TNX rising above a falling trendline drawn over its March/ July peaks. Investors favor stocks over bonds in a stronger economy. When bond yields rise, bond prices fall. That encourages investors to switch from Treasuries to stocks. That also encourages switching into investment grade corporate and high yield bonds which have gained ground since the start of September.
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Chart 3
INDEX OF FOREIGN STOCKS IS RISING FASTER THAN THE US... One of the factors supporting the U.S. stock market is the fact that foreign stocks are also in strong uptrends. To use a word that's currently popular, that makes for a "synchronized" global rally. But there's more to that story. To get a better measure of that, it's useful to look at what foreign stock markets are doing relative to the U.S. The weekly bars in Chart 4 show the MSCI All Country World Index ex US iShares (ACWX) in record territory. That ETF includes foreign developed and emerging markets with its biggest weightings in Japan (17%), Britain (13%), France (7%), Germany (6%), Canada (6%), and China (5%). The bigger message is that foreign stocks are rising faster than the U.S. for the first time in years. That can be seen by the rising solid line which is a ratio of the ACWX divided by the S&P 500. [Since the start of 2017, the ACWX has risen 24% versus a 14% gain in the SPX]. And therein lies an important message. Money has been gradually moving from more expensive U.S. stocks into cheaper stocks around the world. All are rising. But foreign stocks are rising faster. Emerging markets are global leaders in a search for higher yields. Developed markets in Europe and Japan are also playing catch up with the U.S. The falling U.S. dollar this year has helped drive American money into foreign markets. [Americans get a dual benefit when foreign stocks and currencies are both rising, like in Europe]. The Fed's more aggressive monetary policy makes Europe seem more accommodative by comparison which is supportive to European stocks. Japan is even more accomodative which makes their stock market even more appealing. The good news is that the party for global stocks isn't over. But some of the guests are switching rooms. [For more on this subject, please read my May 16 message headlined: "Decade of U.S. Leadership May be Ending"]
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Chart 4
THE DOW CLEARS 23000... The Dow has not only cleared the 23K level, but it's doing so in pretty decisive fashion. Chart 5 shows the Dow Industrials gapping higher today into record territory. It's being led higher by IBM (9%), Goldman Sachs, UnitedHealth, JP Morgan, and Intel. This week's 6% gain in UnitedHealth Group (UNH) has helped push the Health Care SPDR (XLV) to a record high. My only concern with the Dow is that it's 14-day RSI line is in very overbought territory (85%). Also the fact that the Dow is leading the U.S. market higher. That always makes me a little nervous that it's rally is getting overdone. Having said that, market momentum is still clearly to the upside -- here and abroad.
