Wednesday, May 29, 2013

Rising Yields Spook Investors

Bond yields started to spike yesterday, which took a little steam out of the stock market rally.  But today markets are sharply lower on what looks like continued fear about rising rates.  Bond yields rose in Asian markets as well as Europe as well.  And trading in closed end bond funds yesterday really showed the skittishness among investors.

Interest rate sensitive sectors are down the most.  Trading in some of the REITs is showing extreme volatility, while utilities are the weakest sector so far.  I think this is likely an overreaction, and when the dust settles yield-hungry investors and those with cash still on the sidelines will look to come in and buy beaten down REITs and utes.

Asian markets were mixed overnight.  The Bank of Thailand became the latest central bank to lower interest rates, cutting their key rate 25 basis points to 2.50%.  The IMF lowered its forecast for Chinese GDP growth to 7.75% from 8.00% in 2013 and cut the 2014 outlook to 7.75% from 8.20%.

European markets are also lower today, as sovereign bond yields are on the rise.  Germany's unemployment rate held steady at 6.9%.

The dollar is lower this morning but commodities are mixed.  Gold prices are higher near $1388 while oil prices are lower to $94.63.  Copper prices are lower as well.

The 10-year yield is higher to 2.14%.  It last touched these levels in early April, but next major resistance doesn't come into play until around the 2.40% level.

The volatility index is nearly 8% higher this morning, above the 15 level we have been watching to 15.65 currently.  A couple of closes above the 15 level would increase the chances of a further pullback in the stock market, while a reversal back below the 15 level would likely embolden the bulls to do more buying.

Trading comment: The S&P 500 has erased yesterday's gains but is still above the lows from last week.  The SPX touched 1635 last week, so that is a short-term level worth watching.  A break below those levels would be a rare lower low on the weekly chart, at least in recent months.  We are still looking for one last spurt higher by the market closer to the SPX 1700 level before quarter end, though the short-term timing is always difficult.  If that rally materializes, and if it brings out more bullish sentiment that would certainly increase the odds for a summer correction.  I think most strategists are only looking for a mild pullback, but as the herd is often wrong we would not be surprised to see something that rattles investors confidence a bit more.  But let's not put the cart before the horse.


At 12:27 PM, Blogger Med N said...


Post a Comment

<< Home