The stock market lost its mojo this week as the 10Yr Treasury bond yield made new multi-year highs which gave the stock market pause. The Fed is withdrawing its liquidity and raising interest rates which will normalize the interest rate complex – something were have not seen since before the financial crisis. Let’s take a look at this multi-year chart where you can see the breakout to the upside in 10YR Treasury bond yields:
Stocks started the week strong and then faded on Tuesday with lackluster performance. In the following charts you can see the NASDAQ and S&P 500 broke through their triangle patterns to the upside but quickly lost momentum. A head fake to the upside? Not uncommon when you analyze these technical patterns. Perhaps there is one more test to the downside before making new all-time highs or maybe the bull market topped in January. The answer is nigh.
In order, the S&P 500 ETF ($SPY), the NASDAQ 100 ETF ($QQQ) and the Russell 200 ETF ($IWM):
Funny enough, the Russell 2000 made new all-time highs this week. Although nice, it needs to be confirmed by the other indices as no major index goes higher in its own vacuum. See chart below:
So, there you have it. Long term bond yields breaking higher and a stock market that is increasingly showing signs of another move lower. A move higher would be nice but hard to trust without it being a “kickoff” type of event to the upside.
What to look for next week:
- Me using the word “Nigh” in the next post.
- The stock market needs to show positive action very early next week to turn around the sluggish action this week. As you can see in the charts, the triangle patterns are coming to an end so it is going to be a big move one way or another.
- Hey, that volcano in Hawaii might explode so watch out for a caldera in your portfolio if markets correlate to an eruption!
Chart of the Week!
Economic & Central Banking Snippets
- Germany‘s economy cooled sharply in Q1 as a range of temporary factors, such as the country’s flu season and a series of strikes in the metals and engineering sectors, likely contributed to the slowdown. As you can see in the chart below, the growth in the Euro zone has been challenged for some time and is dependent on Germany’s industrial machine for its backbone.
- Japan’s economy contracted in the first three months of 2018 due to weak private consumption and business investment, putting the brakes on the nation’s longest growth streak in 28 years. The news comes as the Japanese economy seemed to have finally escaped decades of stagnation, helped by economic policies including the Bank of Japan’s aggressive monetary easing.
- The rate of US new home construction fell for the second time in four months in April, dragged down by starts on apartment buildings, and adding to the woes for the housing market which is already weighed down by tight supply and rising prices. New housing starts fell 3.7% to an annualized pace of 1.287m last month. (FT)
- Xerox called off its controversial $6.1B sale to Japan’s Fujifilm. The US printer and photocopier maker said its Japanese partner had failed to deliver audited financials, limiting its ability to consummate the transaction. (FT/WSJ)
- Brussels is to propose a 15% cut to trucks’ emissions within seven years, rejecting calls from companies, campaigners and some EU member states for more ambitious targets to help meet climate change commitments. Transport produces a quarter of EU carbon emissions and is the only area of the bloc’s economy in which emissions are still growing, after cuts in sectors such as electricity and agriculture. The EU committed in the Paris climate accord to cut its greenhouse gas emissions by 40% by 2030. (FT/WSJ)
- Apple CEO Tim Cook confirms that Apple Music has over 50M subscribers. The subscribers number includes paid memberships and trials. Spotify hit 75M premium subscribers recently, but has also been around for about a decade longer. Cook’s comment came during a Bloomberg interview where he also acknowledged the company’s plans to build a video content business.(FT/WSJ)
- FedEx CEO Fred Smith is calling blockchain the “next frontier” for the logistics industry due to the potential for huge benefits in supply chain data management. FedEx has already been testing the technology to track valuable cargo and is working with the “Blockchain in Transport Alliance” to set industry standards. Unless a company embraces new technologies such as blockchain, it will face “probably, at some point, extinction,” Smith added. (FT/WSJ)
- The Big Four accountancy firms have drawn up contingency plans for a break up of their UK businesses, an option pushed by politicians and regulators in order to resolve conflicts of interest embedded in the industry. The pressure on the four firms that dominate the sector — KPMG, Deloitte, EY and PwC — to prepare for a forced break-up has increased following high-profile corporate collapses that have called into question the quality of their work as both auditors and consultants for the UK’s largest companies. (FT)
- Intel‘s $15.3B deal for Mobileye is bearing big fruit. The company has signed a contract to supply 8M cars at a European automaker with its advanced self-driving systems. The deal will begin in 2021, when Intel’s EyeQ5 chip, which is designed for fully autonomous driving, is launched as an upgrade to the EyeQ4 that will be rolled out in the coming weeks. (FT/WSJ)
- China sold $2.5B of Treasuries in March amid heightened trade tensions between Beijing and Washington. The largest foreign holder of U.S. Treasuries joined other countries in selling long-term U.S. government debt with a maturity over one year, having been a net buyer in January and February. Despite the selling activity, China’s overall holdings increased by $9B to $1.19T due to changes in Treasury prices.
- Amazon has fired another shot in the supermarket wars, debuting a Prime loyalty program that includes an extra 10% off on sales items and weekly discounts at Whole Foods. The retail giant is also bringing Amazon Go, its grocery store without checkout lines, to Chicago and San Francisco. The move will expand the concept beyond its pilot in Seattle.(FT/WSJ)
- Tesla will need more than $10 billion in capital raises and debt refinancing by 2020, Goldman Sachs analysts said Thursday. That is the sum needed to fund its current operations, new product spend and capacity additions, analysts led by David Tamberrino wrote in a note. It includes Goldman’s expectation that Tesla will launch a new vehicle manufacturing plant and gigafactory in China. “We believe this level of capital transactions may be funded through multiple avenues, including new bond issuance, convertible notes, and equity,” the analyst wrote. (FT/WSJ)
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Paul J. McCarthy, III
President – Kisco Capital