John Murphy has some good analysis today...
BOND YIELDS GAP HIGHER AND NEAR UPSIDE BREAKOUT -- THAT'S HELPING PUSH FINANCIAL SPDR TO NEW RECORD -- BANKS AND INSURERS ARE LEADING XLF HIGHER -- INDUSTRIAL SPDR ALSO NEARS NEW RECORD WITH HELP FROM TRANSPORTS -- MATERIAL SPDR NEARS NEW RECORD -- A RISING DOLLAR IS HURTING GOLD -- COPPER SHARES ARE DOING BETTER THAN GOLD MINERS IN RISING RATE ENVIRONMENT
By John Murphy
UPSIDE BREAKONT IN BOND YIELDS MAY BE IMMINENT... Bonds yields are jumping again today. That may be based on increased chances for a tax reform package. Chart 1 shows the 10-Year Treasury Yield ($TNX) gapping 6 basis points higher in Friday trading. That puts the TNX within striking distance of overhead resistance near 2.40%. An upside breakout is not only likely, but appears imminent. That's pushing Treasury bond prices sharply lower today, and is weakening stocks tied to bonds like utilities and REITS. Defensive consumer staples are also losing ground. [The stock/bond (SPY/TLT) ratio that I showed on Wednesday is also in record territory]. Money is moving into economically-sensitive stocks that do better in a stronger economy. That includes consumer cyclicals, materials, industrials (including transports) and small caps -- all of which are leading today's stock rally. Not surprisingly, financials are the day's standout performers.
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Chart 1
FINANCIAL SPDR HITS NEW RECORD ... Financials are usually the biggest beneficiaries of rising bond yields. And that's certainly the case today. Chart 2 shows the Financial Sector SPDR (XLF) gapping into record territory. The XLF is the day's strongest sector. Banks are leading it higher. Chart 3 shows the S&P Bank SPDR (KBE) gapping up to the highest level in nearly eight months. Insurance stocks are also having a strong week. Chart 4 shows U.S. Insurance iShares (IAK) achieving a bullish breakout into record territory. Financial shares usually do better in a stronger economy. So do other economically-sensitive stocks.
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Chart 2
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Chart 3
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Chart 4
TRANSPORTS HELP LEAD INDUSTRIAL SECTOR HIGHER... The daily bars in Chart 5 shows the Industrial SPDR (XLI)on the verge of hitting a new record. That economically-sensitive sector has also helped lead the market rally since the start of September. That's shown by the rising gray line which is a ratio of the XLI divided by the S&P 500. As I've explained in several previous messages, the XLI includes transportation stocks which have also been helping lead that sector higher. The lower box in Chart 4 shows the Dow Transports also nearing a new record (and helping lead today's rally). Two of today's top percentage gainers in the XLI are CSX and J.B. Hunt (JBHT) which are transportation stocks. Rails and truckers have been among the strongest groups in the TRAN and the XLI. Both groups usually do better in a strengthening economy.
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Chart 5
MATERIALS ALSO NEAR NEW RECORD... Materials are also one the day's stronger sectors. That makes sense considering that rising material shares suggest a stronger economy. The fact that so many of them are tied to commodity prices also hints at higher inflation. Both are consistent with rising interest rates. Chart 6 shows the Materials SPDR (XLB) nearing a new record. It's recent leadership can be seen by the rising gray line (the XLB/SPX ratio). Today's XLB bounce is being led by aluminum and steel stocks. Copper shares have also been rising. By contrast, gold shares are lagging behind (more on that shortly). That also makes sense. Gold doesn't do well when rates are rising. That's especially true with rising U.S. rates are boosting the dollar.
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Chart 6
BOUNCING DOLLAR HURTS GOLD -- RISING RATES BOOST COPPER SHARES... The fact that U.S. rates are rising faster than elsewhere on the globe is boosting the dollar. A rising dollar usually hurts the price of gold. And it is. Chart 7 shows the upturn in the Dollar Index (UUP) near the start of September (when Treasury yields turned up) coinciding with a decline in gold (GLD). It also makes economic sense that a stronger global economy would favor stocks tied to industrial metals (like aluminum, copper, and steel) over gold. And that is certainly the case. The rising brown line in Chart 8 is a ratio of the copper miners ETF (COPX) divided by gold miners (GDX). The ratio recently hit a new high for the year (thanks to a three-year high in the price of copper). Notice how closely the copper/gold mining ratio has tracked the 10-Year Treasury yield (green line). The fact that both lines are rising together is a vote of confidence in the global economy.
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Chart 7
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Chart 8
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Equity Markets1. We’ve had a bit of volatility in the stock market since yesterday, with much of it outside of the US trading hours. It started with the Catalonia crisis and ended with the Senate passing the budget proposal.
Source: BBC; Read full article
Source: WSJ.com; Read full article
Here are the VIX futures.
2. Shares of US homebuilders are soaring despite the slowing residential construction activity. Here is the relative performance versus the S&P 500.
This chart compares the share prices with housing starts and building permits.
Source: @bespokeinvest; Read full article
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5. Goldman’s price-to-book premium to Morgan Stanley is gone (for now).
Source: WSJ.com, h/t Paul Menestrier; Read full article
6. Is (sleepy) IBM finally waking up?
Further reading
7. Trading volumes in the US and Europe have slipped in recent months.
Source: WSJ.com; Read full article
8. Mutual fund fees continue to shrink.
Source: @gadfly; Read full article
9. This chart shows the Dow Jones index average daily moves for each year since 1900.
Source: @bespokeinvest
10. Below we have the relative valuations of European, US, and Emerging Market equities.
Source: @IIF
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AlternativesQuant funds are underperforming, but fundraising doesn’t appear to be a problem.
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Credit1. Puerto Rico’s general obligation debt continues to deteriorate.
2. Kobe Steel’s credit default swap spread has stabilized – for now.
3. Bombardier’s bonds rally after the Airbus tie-up, as the US protectionist move backfires ( see story).
Source: WSJ.com, h/t Paul Menestrier; Read full article
4. This chart shows the percentage of M&A leveraged loans with leverage in excess of 6x.
clearly the animal spirits are inducing the investment shops to crank up the leverage on deals.
Source: @theleadleft, @stevemillerFFD
5. Corporate yield curves are flattening with Treasuries. ---- is this the behavior that occurs towards
the ending of a cycle?? I/m not sure. The slope of the yield curve, the absolute levels of all
interest rates along the curve and the interest rate differentials between the USD and the major
currencies are going to turn into the big story of 2018.... mark my words.... It may take until Q2 or Q3 but
these differentials and a rising rate global rate environment is going to have an impact on stock valuations.
Source: @tracyalloway
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CommoditiesIt’s hot chocolate season. Lower inventories and expectations for higher demand in the US resulted in the cocoa futures’ bounce from the lows.
Back to Index
Energy Markets1. The latest decline in US oil output was also weather related – this time it was Hurricane Nate (supposedly).
2. This chart shows the yearly changes in US crude oil inventories.
Source: @JKempEnergy
3. The Saudis are losing export market share both in the US and in China.
Source: @JavierBlas2
Saudi Arabia is playing a diminishing role in terms of the % of oil imports that are going into
China, Russia is sending more crude and natural Gas into China, Pac Rim countries have expanded
there inputs, and the US has ramped up production.
Source: WSJ.com, h/t Paul Menestrier; Read full article
4. Here is the latest projection of US natural gas usage by sector.
Source: WSJ.com, h/t Paul Menestrier; Read full article
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apan1. Economists expect the BoJ’s securities purchases to keep declining, as yield targeting turns into a form of QE tapering. That is the global theme all global central banks have ended liquidity additions and are tightening
monetary policy. THIS IS A BIG DEAL IN THE BIG PICTURE!!!!!!!!
Source: Capital Economics
2. Japanese shares have decoupled from the dollar-yen exchange rate.
Source: @topdowncharts; Read full article
3. The expected consumption tax hike (in 2019) will do significant damage to the economy.
Source: Capital Economics
JJP |
