December 1, 2016

Stocks opened mixed this morning (Dow +46 pts; SPX -.17%; Nasdaq -1%). Tech is down 1.7% in early trading. The interest rate-sensitive sectors (utilities, consumer staples, real estate) are down as rates rise. On the other hand, financials and energy continue to rally, each up over 1%. It looks like investors are taking money out of tech and shifting into the banks and oil exploration companies. The VIX is up a bit to trade around 13.6 and VIX January futures are up around 16.2, so market volatility is expected to increase in the near future. Commodities are up today (Bloomberg Commodity Index +.9%). WTI crude oil continues to surge ($51/barrel) after Saudi Arabia muscled an OPEC deal to cut oil production by a small amount. Bonds are selling off as yields head higher. The 5- and 10-year Treasury yields are up to 1.89% and 2.45%, respectively. That’s the highest 5-year yield since 2011 and the highest 10-year yield since July 2015. Over the last 3 months, the iShares 20-year+ Treasury bond ETF (TLT) is down 13.5%! This is not the time to own long-term government bonds.   

European stock markets are down today, and so far this year by about 7-10%. At the moment, traders are obsessing about Italy’s constitutional reform referendum this weekend. If it is voted down, traders worry that will open the door for Italy’s opposition Five Star party to then bring a referendum on Italy’s membership in the EU. In addition, the European Central Bank (ECB) meets next week to discuss monetary stimulus. And by the way, negative interest rate fears are receding in Europe. The 10-year German Bund is now trading at about +.3% and the Swiss 10-year at -.1% is steadily moving toward zero. The current French 10-year is trading at +.8%.

ISM’s manufacturing index jumped to a higher-than-expected 53.2 in November, suggesting the manufacturing sector is expanding at the fastest pace in five months. Any reading above 50.0 indicates increasing business activity. Eleven of 18 industries surveyed indicated growth, including plastics, computers, electronics, paper, and petroleum products. The new orders component of the index rose to 53, suggesting further improvement in the near future. The report also revealed that manufacturers are waiting longer for raw materials to be delivered. That could point to improving demand.

The Bureau of Labor Statistics’ Employment Situation Report is due out tomorrow. Economists on average expect to see 180,000 new jobs and the unemployment rate to hold steady at 4.9%.

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