10-YEAR BOND YIELD HITS FIVE-MONTH HIGH -- UK AND GERMAN BOND YIELDS ALSO TURN UP -- 3% UK INFLATION INCREASES ODDS FOR RATE HIKE AND BOOSTS POUND -- ECB IS EXPECTED TO REDUCE BOND PURCHASES
TEN-YEAR TREASURY YIELD REACHES SEVEN-MONTH HIGH ... Treasury bond yields are leading an upturn in global bond yields. Chart 1 shows the 10-Year Treasury Yield ($TNX) rising to the highest level since March. Part of the reason for the upside breakout in the TNX is that foreign yields are also rising. Relatively low bond yields in foreign developed markets have weighed on Treasury yields, as foreign investors purchased higher-yielding bonds in the states. Treasury yields are also rising because the Fed is on track for another rate this year, and is ahead of foreign central bankers in tightening monetary policy. Canada has already raised rates twice this year, but left rates unchanged today. As a result, the Canadian 10-year yield is down today (as is the Canadian Dollar). The Brits are next on deck for a possible rate hike. Inflation has reached 3% in the UK and the BOE is sounding more hawkish. The British 10-Year yield is jumping 5 basis points today and is also breaking through overhead resistance. That explains why the British Pound is up today against the dollar. German bond yields are also showing signs of turning up.
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Chart 1
BRITISH AND GERMAN BOND YIELDS TURN UP ... Chart 2 shows the 10-Year UK Treasury Yield climbing 5 basis points today. It's the first time the yield has reached 1.40% since February. With UK inflation at 3%, the UK is expected to be the next to raise rates. That's boosting the British Pound nearly 1% today against the dollar. Chart 3 shows the 10-Year German Yield hitting 0.48% today for the first time in three months. Mario Draghi and the ECB is expected to announce reduction of its QE bond buying program tomorrow (Thursday). Although the ECB is expected to move very slowly, the process of tapering will begin shortly. That leaves little doubt that the tide is turning away from crisis-era quantitative easing to a more normal monetary policy in developed economies. The fact that foreign yields are rising is helping boost yields in the U.S. That's because global bond yields are highly correlated. The one exception to the trend toward higher rates is Japan, which continues to anchor its 10-Year bond yield at zero percent. Judging from today's trading, the upside breakout in global bond yields is causing some profit-taking in stocks.
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Chart 2
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Chart 3
S&P 500 THREATENS 20-DAY AVERAGE... Chart 4 shows the S&P 500 threatening its 20-day average (green line) which is its first line of defense. Its 14-day RSI line (top of chart) is starting to weaken from overbought territory over 70. So are its daily MACD lines (below chart) which have turned negative for the first time since August. All sectors are in the red today. Weakness in semiconductors is weighing on technology stocks. Advanced Micro Devices (AMD) is down -11%. So called FAANG stocks, which don't do as well in a rising rate climate, also continue to lag behind. Apple (AAPL) remains below its 50-day average, while Facebook (FB) is threatening to close below its 50-day line. Another sign of short-term concern is a 10% bounce in the CBOE Volatility (VIX) Index. Chart 5 shows the VIX climbing to the highest level in nearly two months.
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Chart 4
