June 28, 2017

The major stock market averages gapped up at the open. The Dow and SPX are currently up 134 pts & .75%, respectively. Banks, semiconductors, biotechs and transports are leading the way (all +1% or more). Utilities is the only sector in the red. The dollar is down a bit and most commodities are slightly higher. Oil prices ticked up after a positive gasoline inventory report. WTI crude oil is hovering around $44.70/barrel. Bonds are selling off again for the second consecutive day. The 5-year Treasury yield is up to 1.83% and the 10-year yield is up to 2.22%. Most of the move is reaction to recent comments from central bankers. Yesterday, Fed Chair Janet Yellen said the banking sector is very strong and she doesn’t expect another financial crisis in our lifetimes. Also, European Central Bank (ECB) chief Mario Draghi essentially declared victory over deflation in Europe. Today, Bank of England (BOE) chief Carney said the BOE may have to start raising interest rates soon. 

Technology is 2017’s best-performing sector, up nearly 18%. And the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) are all up 20% or more. But the Nasdaq 100 Index (NDX) just yesterday breeched its 50-day moving average for the first time since December. So you can bet traders will be watching closely for any signs of continued weakness in momentum. At the moment, NDX is down 3.6% from its 6/9 peak. 

US pending home sales (i.e. contracts signed) disappointed economists with a .8% decline in May from prior month levels. But while the headline is clearly negative, reality isn’t so bad. On a year-over-year basis, pending sales rose .5%, exactly in line with Wall Street the consensus forecast. And this is a welcome turnaround from April’s -5.8% y/y rate. Bloomberg explains that the “housing market is settling back to a slower pace because listings remain limited. That’s driving up asking prices and presenting a hurdle for first-time and younger prospective buyers. Nonetheless, steady hiring, easier credit availability and borrowing costs still near historically low levels are supportive for the housing recovery.” 
 
The Federal Reserve is scheduled to announce results of the second part of its annual bank stress test, called CCAR. This is the more important test, the results of which determine whether banks can increase their dividends and stock buy-backs. Price action in the KBW Bank Index (BKX) over the last few days seems to be predicting positive results. 
 


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