STOCKS END MODESTLY LOWER AFTER VOLATILE WEEK -- REITS AND UTILITIES WERE THE WEEK'S STRONGEST SECTORS -- ENERGY AND FINANCIALS THE WEAKEST -- MATERIALS ARE BEING LED HIGHER BY GOLD MINERS -- WHILE COPPER MINERS REMAIN WEAK
STOCKS END MODESTLY LOWER AS BOND YIELDS WEAKEN...After a week of wild swings, stocks ended only modestly lower on the week. The devaluation of the Chinese yuan to the lowest level in more than a decade set the tone for a volatile week in financial markets. The 10-year Treasury yield tumbled to another three-year low which continued the money flow into safe haven Treasuries. Gold prices hit another high (along with the yen) while most other commodities lost ground (more on that shortly). Falling bond yields are a sign of a weakening global economy. That had a lot to do with this week's sector rankings.
Chart 1 shows Real Estate (XLRE) and Utilities (XLU) in the top spot for the week. The XLRE hit a record; while the XLU isn't far behind. That's a side effect of falling bond yields as investors continue to seek higher-yielding (and safer) market sectors. The week's two weakest sectors were Energy (XLE) and Financials (XLF). That's not too surprising either. The Energy SPDR (XLE) hit a new low for the year on falling crude oil prices. Falling oil prices reflect lower commodity inflation which is one of the factors pulling bond yields lower. Falling bond yields are hurting financials stocks, and banks in particular. Materials (XLB) came in third. Normally, that would be a sign of optimism. A look beneath the surface, however, paints a more cautious outlook.
GOLD IS LEADING XLB HIGHER... Materials are normally viewed as an economically-sensitive sector because it's closely tied to commodity prices which are themselves barometers of inflation and the strength of the global economy. Chart 2, however, breaks the Materials SPDR (XLB) down into smaller groups and shows where recent strength has been coming from. And where it's not. Gold miners were its strongest group over the last week (as they've been for several months). Gold miners rise with the metal when investors are seeking a safe haven against plunging global interest rates and fears of a slowing global economy.
The three weakest materials groups for the week were aluminum, nonferrous metals (copper), and steel. That's also nothing new. Over the last three months, gold miners have gained +35%, while aluminum and copper shares have dropped -22% and -13% respectively. Copper in particular is used in construction and manufacturing. And is viewed as a barometer of global economic strength or weakness. Copper is also closely tied to China which accounts for half of copper imports. It's also closely tied to the Chinese yuan which is used to buy that copper. A falling yuan makes imported copper more expensive. The yuan fell to an eleven-year low this week, while copper and its miners fell to a new low for the year. The combination of rising gold prices and falling copper prices isn't a sign of confidence in the global economy. In fact, it's a sign of caution resulting from signs of global weakness.
GOLD MINERS RISE WHILE COPPER MINERS DROP... The weekly bars in Chart 3 compare the recent divergent trends of gold and copper mining shares. The brown bars show the VanEck Vectors Gold Miners ETF (GDX) rising this week to the highest level in three years. The red bars show the Global X Copper Miners ETF (COPX) falling to the lowest level in three years. That's not a vote of confidence in the global economy. If anything, it shows loss of confidence.
FALLING COPPER/GOLD RATIO IS A SIGN OF WEAKNESS... Chart 4 compares a ratio of the price of copper divided by gold (red line) to the 10-Year Treasury yield (green line) over the last decade. And it shows them trending in the same direction during that period. They plunged together during 2008, during 2011 and 2012, and again between 2014 and 2016 (see circles). [Stock prices weakened in all three instances]. The latest downturn in both started during 2018 (see arrows), and continues to the present with both falling this week to the lowest level since 2016. There's a reason for that. Bond yields are falling on fears of slowing global growth. A weaker global economy is reducing demand for copper and pushing its price lower. That combination is pushing money into gold (and its miners) which do better when global yields are falling and investors are looking for a safer alternative.
UTILITIES LEAD WHILE TRANSPORTS LAG...My Friday message compared the three Dow Averages, and explained that falling transportation stocks and rising utilities are a caution sign for the stock market. Falling transports imply a slowing economy; while rising utilities result from falling bond yields which also imply economic slowing; and a flight to more defensive sectors. Chart 5 compares the three Dow Averages this past week. And it shows utilities gaining ground and in the lead once again; while transports lost ground and continue to lag behind the other two. That's another sign of caution on the stock market and the economy.
