DOVISH ECB OFFSETS HAWKISH FED -- DROP IN EURO BOOSTS DOLLAR -- GOLD AND DOLLAR WON'T BOUNCE TOGETHER FOR LONG -- FINANCIALS FAIL TO RESPOND TO FED RATE HIKE -- REITS TRY TO HOLD 200-DAY LINE -- S&P 500 NEARS TEST OF ITS MARCH HIGH
ECB WON'T RAISE RATES FOR ANOTHER YEAR ... The Fed raised its short-term rate by a quarter point yesterday as expected. But it also added a fourth rate hike this year which gave its announcement a more hawkish tilt. That had the immediate effect of boosting Treasury bond yields and weakening bond proxies like utilities and REITS. Bank stocks, however, ended in the red after an early bounce. And stock indexes lost a little ground. A dollar bounce also faded by day's end. Some of those reactions to the Fed are being offset today by dovish comments from Europe. The ECB will end its bond buying program by the end of this year. What apparently caught the market's attention, however, was its plan to keep rates unchanged until at least the middle of 2019. That had the immediate effect of pushing the euro lower against the dollar. Chart 1 shows the euro falling more than 1% today and nearing a possible retest of its late May low. Eurozone bond yields also dropped which, in turn, are pulling Treasury yields lower today. That may also explain today's buying of gold. European stocks rallied on that dovish announcement. Stocks in the states are mixed today.
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Chart 1
DOLLAR IS BOUNCING ALONG WITH GOLD ... Today's big drop in the euro is giving a boost to the dollar. Chart 2 shows the U.S. Dollar Index ETF (UUP) nearing a possible test of its late May peak. The Dollar Index has been struggling with resistance along its November high. Dollar direction effects a lot of other markets. One of them is gold. Chart 3 shows the Gold Shares SPDR (GLD) also bouncing today. That's a little unusual since the two markets usually trend in opposite directions. The 60-day Correlation Coefficient between the two markets is a very negative -0.95. That means that the dollar and gold trend in opposite directions 95% of the time. That makes it doubtful that both will keep rising together for very long. Ultimately, the direction of the dollar will decide the direction of gold (in the opposite direction). GLD also remains below its 200-day average.
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Chart 2
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Chart 3
FINANCIALS WEAKEN WHILE REITS REBOUND... Financial stocks disappointed a lot of traders yesterday by failing to hold their early gains. Chart 4 shows the Financial Sector SPDR (XLF) slipping again today. The inability of financials (and banks in particular) to hold their rebound after yesterday's rate hike is surprising. Today' pullback is a little more understandable after the more dovish tone in Europe. Keep in mind that lower eurozone bond yields act as a drag on higher-yielding Treasury yields. That's not necessarily a good thing for banks and other financial stocks which rely on higher interest rates. REITs had a bad day yesterday following the Fed hike and rise in bond yields. Chart 5, however, shows the Real Estate Sector SPDR (XLRE) bouncing today (as yields drop). The XLRE recently climbed above its 200-day moving average but is struggling to stay above that red support line. REITs are usually hurt by rising bond yields. Utilities are also bouncing today, while financials are the day's weakest sector.
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Chart 4
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Chart 5
S&P 500 NEARS TEST OF MARCH HIGH... Most U.S. stock indexes are seeing minor gains today, which isn't surprising given conflicting statements from the world's two biggest central bankers. Chart 6 shows the S&P 500 trading just below potential resistance at its mid-March peak near 2800. Its 9-day RSI line (top box) has reached short-term overbought territory near 70. Which raises the possibility of a short term pullback or consolidation. If one does occur, Chart 6 shows underlying support near 2740 which is the high reached during May (flat green line) and the rising trendline drawn under its May lows. Any pullback, however, would still be part of an overall rising market trend. An eventual rise above the March high looks more than likely.
