David Moenning�s Daily State of the Markets: 03/07
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Rates Trump All
While it isn�t always the case, sometimes this game just isn�t very hard to figure out. For example, there was no mystery whatsoever surrounding yesterday�s fall in the stock market. The drop in prices was tied directly to a fourth straight day of higher interest rates, where the yield on the 10-year rose to its highest level since June 2004.
When interest rates rise, the action tends to trump just about everything else as traders know all to well the affect that rising rates can have on corporate profits. So while the AT&T for BellSouth deal certainly created some excitement in M&A-land and it was encouraging to see oil pull back, the bulls simply had no answer for rates rising to 21-month highs.
The cause for the increase in rates however, is a bit more complicated. As the global economy becomes more intertwined every year, the actions of central banks overseas have an increasing impact on our currency, which, in turn impacts the level of our interest rates. In English, as we�ve mentioned recently, last week, the European Central Bank raised rates. The feeling among economists is that this was simply the first in a series of rate hikes as the world definitely took notice of the success our FOMC has enjoyed with their measured approach to increasing rates over time. Higher rates in Europe means the Euro is worth more and the US$ is worth less, which, in turn makes our bonds less attractive. And so, in order to remain competitive, market rates in the U.S. have to rise.
So why are stocks falling? The answer is fear and uncertainty, of course. You see, the higher rate story isn�t limited to just the ECB. For years now, Japan�s central bank has maintained a 0% interest rate policy in an effort to boost their economy. But with their economy having finally turned the corner, the Bank of Japan will surely take a page out of Mr. Greenspan�s book by beginning to �remove the excess accommodation.� While this has not occurred yet, the BOJ does meet tomorrow and Thursday and the topic of higher rates is almost certain to come up.
So with rates rising in Europe and rates about to begin rising in Japan, this puts further pressure on rates here in the U.S. Now toss in the fear that the central banks might overdo things, which could easily impact the global economy, and anybody with a predilection for nervousness is certain to do some selling. And finally, with 8,000 hedge funds out there, there are bound to be a few still playing the Yen-carry trade, which clearly loses its allure as rates rise in Japan.
So in short, higher rates trump everything else. And with interest rates spiking higher over the past four days (the yield on the 10-year has risen from 4.55% to 4.74% so far this month) stock traders are taking notice. The question from here, of course, is will rates continue to climb? If so, you can bet that the action will rally the troops in the bear camp. And with stocks still within spitting distance of their recent highs, this situation bears close attention going forward.
Turning to this morning, interest rates are continuing to rise in response to the Q4 productivity report. While this report was a �final revision,� the Labor Cost component came in higher than expected at +3.3% versus expectations of +3.0%. This gives bond traders even more reason to sell as labor costs are a primary focus of the FOMC at the present time. So with the 10-yr looking like it has a bead on the 2004 highs of 4.8%, stocks may struggle for a third straight day.
Running through the pre-market indicators an hour before the bell, overseas markets were lower in Asia in response to TXN�s disappointing mid-quarter update. European markets are also lower with Germany seeing the most selling pressure at the moment.
Oil futures are hovering around breakeven this morning with crude currently trading -$0.05 to $62.36. Oil is stable on word that OPEC will NOT attempt to reduce production at tomorrow�s meeting. Moving on, Natural Gas is quoted up by $0.02 at $6.57 right now. Gold futures are down -$1.30 to $555.50. As we mentioned, bond yields are moving up strongly again this morning with the 2-yr yield currently quoted at 4.79% while the 10-yr is at 4.77%, which, again, is the highest level since June 2004. And finally, stock futures in the U.S. are pointing lower at the moment with the Dow currently -33, the S&Ps are -5.0, and the NASDAQ is lower by -7.
Stocks "In Play" This Morning:
INTC � Downgraded at Susquehanna
BA � Announces orders for six 787-8 aircraft from Kenya Airways
CSCO � To acquire Sypixx Networks for $51M
OVEN � Reports -$0.25 vs. -$0.09
TXN � Ups low end of EPS guidance, but mid-qtr update disappointing overall
GOOG � WSJ cites plans to act as users� hard drive in file storing service
ABS � Reports $0.54 vs. $0.44
BLS � Upgraded at UBS and Cowen
PENN � Upgraded at JPM
QCOM � Raises guidance, increases dividend
Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: AMD, INTC, AMAT
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning�s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM�s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
While it isn�t always the case, sometimes this game just isn�t very hard to figure out. For example, there was no mystery whatsoever surrounding yesterday�s fall in the stock market. The drop in prices was tied directly to a fourth straight day of higher interest rates, where the yield on the 10-year rose to its highest level since June 2004.
When interest rates rise, the action tends to trump just about everything else as traders know all to well the affect that rising rates can have on corporate profits. So while the AT&T for BellSouth deal certainly created some excitement in M&A-land and it was encouraging to see oil pull back, the bulls simply had no answer for rates rising to 21-month highs.
The cause for the increase in rates however, is a bit more complicated. As the global economy becomes more intertwined every year, the actions of central banks overseas have an increasing impact on our currency, which, in turn impacts the level of our interest rates. In English, as we�ve mentioned recently, last week, the European Central Bank raised rates. The feeling among economists is that this was simply the first in a series of rate hikes as the world definitely took notice of the success our FOMC has enjoyed with their measured approach to increasing rates over time. Higher rates in Europe means the Euro is worth more and the US$ is worth less, which, in turn makes our bonds less attractive. And so, in order to remain competitive, market rates in the U.S. have to rise.
So why are stocks falling? The answer is fear and uncertainty, of course. You see, the higher rate story isn�t limited to just the ECB. For years now, Japan�s central bank has maintained a 0% interest rate policy in an effort to boost their economy. But with their economy having finally turned the corner, the Bank of Japan will surely take a page out of Mr. Greenspan�s book by beginning to �remove the excess accommodation.� While this has not occurred yet, the BOJ does meet tomorrow and Thursday and the topic of higher rates is almost certain to come up.
So with rates rising in Europe and rates about to begin rising in Japan, this puts further pressure on rates here in the U.S. Now toss in the fear that the central banks might overdo things, which could easily impact the global economy, and anybody with a predilection for nervousness is certain to do some selling. And finally, with 8,000 hedge funds out there, there are bound to be a few still playing the Yen-carry trade, which clearly loses its allure as rates rise in Japan.
So in short, higher rates trump everything else. And with interest rates spiking higher over the past four days (the yield on the 10-year has risen from 4.55% to 4.74% so far this month) stock traders are taking notice. The question from here, of course, is will rates continue to climb? If so, you can bet that the action will rally the troops in the bear camp. And with stocks still within spitting distance of their recent highs, this situation bears close attention going forward.
Turning to this morning, interest rates are continuing to rise in response to the Q4 productivity report. While this report was a �final revision,� the Labor Cost component came in higher than expected at +3.3% versus expectations of +3.0%. This gives bond traders even more reason to sell as labor costs are a primary focus of the FOMC at the present time. So with the 10-yr looking like it has a bead on the 2004 highs of 4.8%, stocks may struggle for a third straight day.
Running through the pre-market indicators an hour before the bell, overseas markets were lower in Asia in response to TXN�s disappointing mid-quarter update. European markets are also lower with Germany seeing the most selling pressure at the moment.
Oil futures are hovering around breakeven this morning with crude currently trading -$0.05 to $62.36. Oil is stable on word that OPEC will NOT attempt to reduce production at tomorrow�s meeting. Moving on, Natural Gas is quoted up by $0.02 at $6.57 right now. Gold futures are down -$1.30 to $555.50. As we mentioned, bond yields are moving up strongly again this morning with the 2-yr yield currently quoted at 4.79% while the 10-yr is at 4.77%, which, again, is the highest level since June 2004. And finally, stock futures in the U.S. are pointing lower at the moment with the Dow currently -33, the S&Ps are -5.0, and the NASDAQ is lower by -7.
Stocks "In Play" This Morning:
INTC � Downgraded at Susquehanna
BA � Announces orders for six 787-8 aircraft from Kenya Airways
CSCO � To acquire Sypixx Networks for $51M
OVEN � Reports -$0.25 vs. -$0.09
TXN � Ups low end of EPS guidance, but mid-qtr update disappointing overall
GOOG � WSJ cites plans to act as users� hard drive in file storing service
ABS � Reports $0.54 vs. $0.44
BLS � Upgraded at UBS and Cowen
PENN � Upgraded at JPM
QCOM � Raises guidance, increases dividend
Disclosure: At the time of publication Mr. Moenning and/or related companies are long the following positions: AMD, INTC, AMAT
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management (HCM) and may not actually come to pass. Mr. Moenning�s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM�s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
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