Month: July 2016

• Wells Fargo, which does not have an investment banking business like the aforementioned JP Morgan and Morgan Stanley, reported dismal earnings and fell around 2.5%, reversing some of the gains of the financial sector yesterday as Wells Fargo is the largest bank. The bank was especially adversely affected by low interest rates, according to the WSJ. This contributed to the sluggish market performance today.
• The VIX is down 1.17% today, showing that volatility and therefore fear is lower in the markets. The VIX is now at 12.67, a very low level. This contributed to the fall in bond prices and the large increase in 10 Year T-Note yield (up 4.18% today) as investors pursue the now less risky stock market instead of the low-yielding bond market.
• Retail sales rose a higher than expected 0.6% in June according to Bloomberg, offsetting weak vehicle sales in the US. This economic indicator shows that consumer spending is still strong and possibly canceled out the negative effects of weak financial earnings today.

This has been my last daily bulletin. I hope they have provided some information as to why the market is moving for the past three weeks.

– Michael Trehan

• 10 Year T-Note yields continue to rise today by 4.22% along with the Dow, which rose by 0.73%. The previous correlation oddities have now been broken, and now investors are selling bonds in order to purchase stocks, according to the WSJ.
• The Bank of England followed through on expectations to provide stimulus, helping the FTSE and the Dow gain. Domestic bank stocks like JPMorgan and Morgan Stanley beat on earnings, and rose 1.5% and 3.1%, pulling the broader market up.
• The US Economic Surprise index by Citigroup rose to positive territory (13) for one of the first times in the past year and a half, according to the Wall Street Journal. The fact that there are upside surprises, as indicated by this index, shows that even under the weak EMH, the market can be positively affected by further news developments.

• According to the WSJ, a full 33% of sovereign debt worldwide is now issued at negative yields. This is not a new trend, but it coincides with a worldwide rise in stock markets. This pattern breaks the previously known positive correlation between bond yields and stock prices. High bond prices are caused by an overreliance on debt financing and lack of actual capital investment.
• The domestic energy sector fell today by 0.86% as measured by XLE as the Middle East regains market share in the oil production industry. The Middle East now holds a 35% share in oil production. The fact that the energy sector was down while the general market was up exacerbates the negative effects of this news.
• Economists expect the Bank of England to lower benchmark rates by 0.25% at its meeting tomorrow, a move that will calm the market and thus has already been priced into the market, causing today’s upward movement.

• Government bond prices in the US, UK, France, Sweden, and Denmark fell today, with 10 Year T-Note yields jumping by 5.44%. According to the WSJ, investors are less likely to accept low returns because of confidence caused by the possibility of Japanese stimulus and the knowledge that Theresa May will be Britain’s next PM.
• The Dow joined the S&P in setting a new record, up 0.66% to 18347.67. One contributing causative factor the WSJ points out is “share buybacks,” in which companies buy back their own shares from investors to boost both shareholder confidence and stock price. Total buybacks for this year so far total $357 billion according to Birinyi Associates.
• The British pound has not significantly recovered against the dollar with GBP/USD at 1.314 today , and is not expected to do so, according to the CFTC. This is because money managers are still holding mainly short positions, and this behavioural finance suggests that the pound will fall.

• 10 Year T-Note yields skyrocketed today by nearly 5%, as investors realized the statistical aberration of falling yields and rising stock market prices. Those who were risk averse due to the fallout from Brexit have seen the rising prices in US markets and finally moved their money into the stock market and out of the bond market over the weekend, causing a lower demand for bonds, lower bond prices, and higher yields.
• The Dow was moderately up by 0.44% as confidence is restored in Britain. Previous uncertainty about British leadership has cleared over the weekend, according to the WSJ, causing the British FTSE 250 to rise by a whopping 3.4% today. The positive correlation between British and US stocks led to a smaller positive move domestically.
• As Brexit’s impact on the market subsides, the stock market will be most affected by domestic news, including bank earnings and other corporate profit reports for the second quarter. Today, the S&P 500 set another record high of 2136.92. Volatility as measured by the VIX is at a low level of 13.54, suggesting that the stock market trends described above have been caused by a reduction in fears, and less by positive news, meaning that there is still upside potential domestically based on earnings.

•  10-Year T-Note yields fell to a record low of 1.366% today, indicating an extreme demand for risk free assets. However, American stocks rose as well, with the Nasdaq Composite up 1.64%, its strongest performance in more than a week. One likely causative factor for this break in correlation is a global trend towards investment in American securities, be it stocks or risk free bonds.
• Global uncertainties, especially with Brexit, and strong domestic American manufacturing and service sector activity caused a movement towards safer countries, especially the United States. Japan became a less attractive haven today as Japanese service sector sentiment weakened by 1.8 points to 41.2 for June, the worst reading since October 2014 according to Reuters.
• The movement towards American securities today concentrated on basic materials (XLB) and industrials (XLI), with those sectors up 2.4% and 1.96% respectively. The outstanding performance of these sectors suggests that domestic manufacturing is strong and foreign investors want to take advantage of reliable dividends.

• The Dow continues to fall, although it recovered in a “V” shape towards the end of the day for a total loss of 0.13%. The Nasdaq, however, was up almost 0.4%. This was caused by energy stocks (represented by XLE) falling by 1.02% due to a 4.8% drop in crude oil prices to $45.14. Crude oil and energy stocks, which are a larger component in the Dow than the Nasdaq, are directly correlated.
• Other than energy, investors returned to a “risk-on” mode by selling stocks that they had moved into as safe havens because of Brexit, according to the Wall Street Journal. Utilities (XLU), one of these havens, fell 1.85% today.
• 10-Year T-Note yields rose moderately by 0.14%, corresponding to a decrease in prices caused by a decrease in demand. This decrease in demand was also due to a move away from conservative assets, as concerns over Brexit are having less of an effect and investors return to worrying about domestic news.

• Some British funds, like Henderson Global and Canada Life, have stopped investors from withdrawing their money. This is one possible factor that could have prevented the markets in Europe, which are correlated with the US for the past few weeks, from continuing their slide. The Dow and Nasdaq were slightly up, 0.44% and 0.75% respectively.
• Because 10 Year T-Note yields have fallen quite precipitously due to an influx of money from a flight to safety, yields increased today by 1.32% caused by a decreased demand. However, Japanese bonds have been seeing increased demand, leading to a yield drop into negative territory for even their 20 Year bond, which stands at -0.005%. This move has been caused by investors who believe the yen is the safest currency, according to the WSJ, leading to a flight to yen-denominated securities. This has also negatively influenced T-Note prices (and positively affected yields).
• Risky sectors like biotechnology, though still domestic, caused the stock markets to rally today. Biotech was up by 2.3% (Nasdaq Biotech Index), while health care also gained 1.2%. According to the WSJ, this in turn was caused by renewed confidence in the US economy due to positive service sector activity for June.

• With 10 Year T-Note yields continuing their slide, down 5.46% just today, the yield curve has begun to flatten. This fall in bond yields (increase in prices), especially in the long run, has caused banks to be able to make less of a profit by taking advantage of the yield differential between short and long run. According to the WSJ, these increases in bond prices will lead to large decreases in profits and stock prices for the financial sector.
• Stock prices continue to fall, reversing their rally last week with the Dow and Nasdaq down 0.61% and 0.82% respectively due to an increase in investors’ risk aversion. This conclusion is also supported by the fact that bond prices have increased, indicating a demand for safer bonds versus stocks.
• This uncertainty in the market has been caused by continued fallout from Brexit, as JP Morgan fell 2.79% today and stocks linked to risky assets like commodities have fallen (SPDR Energy XLE is down 2%). The general shift away from riskier sectors shows that investors are being more risk averse in their security selection and the move to bonds shows that investors are being risk averse in their asset allocation as well.

• The 10 Year T-Note yield hit a record low of 1.385% today, then recovered to a yield of 1.446%. This drop in yields is caused by a demand for bonds, and the factor causing this demand is a combination of the flight to safety from volatile stock markets and negative yields in countries like Germany and Japan.
• Emerging markets may be driving markets higher, according to the Wall Street Journal. These markets were adversely affected by Brexit for no apparent reason other than simple correlation with the general market, and are recovering at a faster pace: A popular emerging market ETF, ticker EEM, is down only 0.20% since Thursday’s close, while the Nasdaq Composite (of a more accurate comparative risk level than the Dow) is still down close to a percent on the same period.
• American consumer discretionary shares rose the most this past week (SPDR Discretionary XLY is up 1.10% today), suggesting that the market’s rise was caused not by a fundamental rectification of the questions Brexit poses, but a return to normal levels in stocks that should be unaffected by Brexit. This conclusion is further adduced by the fact that Treasury yields remain at near-record lows, indicating that Brexit still poses lurking risks that may resurface next week.