10 Year Yield Nears 2% As Expected

Huge Day For Markets Because Of Trade Reports

Positive news on trade pushed the S&P 500 and Nasdaq to new record highs and the 10 year yield much higher. It nearly hit my 2% target. That was quicker than expected. S&P 500 was up decently for most of the day, but lost some steam in the afternoon. That’s probably because the market is extremely overbought. 

Even a trade deal wouldn’t get stocks much higher in this situation. Generally, you want to sell markets that can’t rally on good news. You want to buy markets that don’t sell off on bad news. It seems like all the good news is priced in.

News on trade is that President Trump is probably going to announce phase 1 of the deal is complete in early December. He is going to London for a NATO meeting on December 3rd and 4th. The deal could either be announced before or after that meeting. There are reports China will cancel its tariffs on America in a phased manner. 

With the rally in stocks, investors are expecting most tariffs put in place in this trade battle to be eliminated. It wouldn't be surprising if the stock market sells off on the day of the announcement. A deal is priced in and the details disappoint investors. Plus, a trade deal doesn’t guarantee there will be a cyclical recovery. The economy won’t be perfect in 2020. There simply will be fewer self-inflicted wounds.

Specifically, the S&P 500 was up 0.67% at noon, but it closed up only 0.27%. I strongly believe there isn’t much upside left in the market in the near term. Now, I know the market is in a seasonally strong period, but the rally has gone too far. 

S&P 500 is up 6.64% since October 8th. Percentage of bulls is only modestly above average. Adding to that point, the 4 week increase in the percentage of bulls was nearly 20 points. The last such increase in 4 weeks was 22.9 points from December 2017 to January 2018. 

Investors have rapidly gone from bearish to slightly more bullish than average which is different from the last spike where investors became wildly bullish. This isn’t like the January 2018 top. On the other hand, the CNN fear and greed index is at 91 which is extreme greed. It’s very rare for it to get this high. And it’s also why many see limited upside in the next few weeks. Investors expect a 5% correction soon.

Big Selloff In Long Bonds

Nasdaq and the Russell 2000 were both up 0.28%. VIX was up 0.11 to 12.73 which is still very low. Biggest news in markets on Thursday was definitely the major selloff in the 10 year bond. As you can see from the chart below, the 10 year yield went up 15 basis points to 1.96%. It nearly hit my target of 2%. I still expect it to increase, but I’m obviously less bearish on the long bond now that it’s near my target. 

Latest yield as of Thursday evening is 1.92%. 2 year yield is at 1.67% which means there is a 25 basis point difference between the two. The curve has steepened as I expected. Chances of a rate cut in December fell to just 8.1%. And, chance of a rate cut in all of 2020 is now only 49.8%. 

Personally, I expect the odds to fall further because the next movement will be a hike, probably in 2021. Fed is done cutting for at least the next few meetings.

Sectors React To Rise In Rates

Utilities and real estate fell sharply as they were the biggest losers again. They fell 1.35% and 1.08%. I’m actually surprised they didn’t fall further given the large run up in yields. They probably didn’t fall much because they are very oversold. 

As you can see from the chart on the bottom right, only 11% of utilities stocks are above their 50 day moving average. The sector is down 4.34% since October 24th. Best sector was energy which increased 1.58%. It has been rallying the most on positive trade news lately. 

Tied for 2nd best was the financials which was up 0.67%. Obviously, this sector loves when yields rise and the yield curve steepens. This is good for net interest margins. As the top left chart below shows, 86% of financial stocks are above their 50 day moving average. Selloff in the long bond has been sharp and quick.

Bloomberg Is Running For President

Betting market for the Democratic primary shifted dramatically on the news that Bloomberg is actively considering running for president in the Democrat party. His odds increased to 13% from 3%. Buttigieg’s odds fell 3 points to 16%. Biden’s odds fell 4 points to 19% and Warren’s odds fell 2 points to 30%. Healthcare sector didn’t react because the news came out after the trading session ended.

There’s no chance he will make the November 20th debate because the cutoff to make it is November 13th. He hasn’t officially announced yet and he needs 165,000 donors to make the stage. Llatest 2 national polls have Biden tied for the lead with Warren and him leading by 1. He leads by 7.7 points in the average of recent polls. 

Sanders and Buttigieg have gained some momentum. Warren has lost significant momentum, but is still in 2nd place as she’s up by 3 points on Sanders in the average of recent polls.

Conclusion

It’s interesting to see the 10 year yield increase so much on the news of a possible trade deal since that’s not a surprise. Technically, this isn’t a done deal as there have been reports like this before. Maybe treasury investors were trying to find an excuse to sell the long bond because they see a recovery occurring in 2020. 

The stock market is extremely overbought. I can’t see stocks increasing much more from here. Bloomberg running for president throws a wrench into the race. Markets (outside the betting market) might not react too much until they see polls with him having some support.

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