REBOUND IN BOND PRICES SHOWS FLIGHT TO SAFETY -- THAT'S ALSO BOOSTING REITS AND UTILITIES -- AND HOMEBUILDERS -- AND KEEPING BANKS ON THE DEFENSIVE -- GOLD MINERS REBOUND WHILE COPPER SHARES DROP
TREASURY BOND YIELDS CONTINUE TO DROP... The drop in Treasury bond yields that started a month ago is continuing. And is nearing a test of some important support levels. The daily bars in Chart 1 show the 30-Year Treasury yield (TYX) having already broken a rising trendline drawn under its August/October lows; and nearing a test of its early December intra-day low near 2.14%. Yields of other maturities are also dropping.
Chart 2 shows the 10-Year Treasury yield (TNX) falling as well. The TNX has fallen to the lowest level in seven weeks and threatening its five-month rising trendline; and its early December intra-day low just below 1.70%. Any drop below those support levels would signal even lower bond yields. This week's drop in global bond yields may be in response to the virus threat from China which has caused some rotation into the safety of government bonds.
TREASURY BOND PRICES ARE GAINING...When bond yields drop, bond prices rise. And that's exactly what's happening. Chart 3 shows the 20+Year Treasury Bond iShares (TLT) rising above a falling trendline extending back to late August; and is challenging its early December intra-day high. Shorter-maturity bond prices are also rising.
Chart 4 shows the 7-10 Year Treasury Bond iShares (IEF) already trading at the highest level in nearly four months; and above the falling trendline drawn over the September/October highs. As mentioned previously, that looks like a flight to safety probably owing to global concerns about fears that the Chinese virus might spread to other regions. Especially with Chinese stocks taking another big hit today; and global stocks in general on the defensive.
BOND PROXIES ARE IN THE LEAD...Previous messages have pointed out that rising bond prices (and falling yields) usually benefit dividend-paying groups like utilities and REITS. And both of those bond proxies are in the lead again today. Chart 5 shows the Utilities Sector SPDR (XLU) hitting a new high again today after achieving a bullish breakout into record territory last week. Chart 6 shows the Real Estate SPDR (XLE) also having a strong day after achieving a new record high on Tuesday. They're two of the day's strongest sectors; and are also considered to be defensive in nature. Falling bond yields, however, are helping make financials one of the day's weakest sectors.
FALLING YIELDS HURT BANKS...Previous messages have also shown falling bond yields starting to weigh on financial stocks, and banks in particular. So it's no surprise to see bank selling helping lead financials lower today. Chart 7 shows the KBW Bank Index (BKX) falling further below its 50-day average (blue line) and slipping to the lowest level in nearly two months. The two upper boxes show its 14-day RSI and MACD lines also in decline. The green bars show the close correlation between the BKX and the 10-Year Treasury yield. Both started dropping together near the end of December; and are continuing to do so. Falling yields, however, are continuing to boost homebuilders.
LOWER YIELDS BOOST HOMEBUILDERS... Previous messages have also shown falling bond yields helping push homebuilders into record territory. Chart 8 shows U.S. Home Construction iShares (ITB) hitting a new record again. Home construction stocks are the strongest part of the Consumer Discretionary SPDR (XLY) today. The brown bars show homebuilders turning up to reach a new record shortly after the 10-Year Treasury yield peaked in December (green bars). Which means that the drop in yields carries good news for some stocks, and bad news for others. And the four groups shown herein are reacting as they should to falling bond yields; and rising bond prices.
GOLD MINERS REBOUND WITH METAL WHILE COPPER SHARES SINK... Another sign of a more defensive tone in the market is this week's diverging action in gold and copper miners. Within the commodity complex, safe haven gold is rebounding; while economically-sensitive copper and oil prices are dropping. And that divergence is being reflected in their respective stocks. Energy stocks continue to weaken along with the price of crude oil (and natural gas). Chart 9, however, shows the VanEck Vectors Gold Miners ETF (GDX) rebounding this week along with the yellow metal. That may also be a reaction to falling bond yields (since gold doesn't pay any interest and does better when yields drop); as well as a flight to safe haven assets. At the same time, copper producers are dropping sharply.
Chart 10 shows the Dow Jones US Nonferrous Metals Index (composed mainly of copper miners) falling sharply this week; along with the price of copper which is also dropping. That may also be a reaction to fears of the Chinese virus having a negative impact on that economy. China is the world's biggest buyer of copper.
