July 24, 2018

The major stock market averages surged at the open following a spate of better than expected earnings announcements. The Dow is up 185 pts and the SPX is up .6%. Energy and materials—i.e. commodity-based sectors—are up over 1% in early trading. Only the defensive interest-rate sensitive sectors—utilities, consumer staples, real estate—are down. The VIX Index is sagging back down to 12.2 as investors’ fortunes look slightly more secure this morning. WTI crude oil is up sharply to trade around $68.80/barrel. Copper, gold and iron ore are all up as well. Bonds are mixed this morning. The 5-year Treasury yield ticked up to 2.82% and the 10-year yield is flat around 2.96%. Short-term bonds are flat but everything else is up a bit. 

We’re seeing a mini-back-up in rates and a little steepening of the yield curve. According to Bloomberg, one big reason for that is the Bank of Japan (BOJ). Citing media reports that the BOJ will discuss changes to its ultra-loose monetary policy next week, Bloomberg notes that sovereign bond yields around the world immediately moved higher. We know that US rates have been held down—or distorted—as other central banks around the world pursued low interest rate strategies. That’s because global investors would rather buy US Treasuries at nearly 3% than buy a German 10-year at .4% or a Japanese 10-year at .1%. So all the extra demand for Treasuries have held rates down. Some of that may be turning around as the European Central Bank and BOJ begin to reduce monetary stimulus.  

Alphabet (GOOGL) reported strong second quarter results and the stock is up 4% to an all-time high. The company managed to beat Wall Street expectations for both revenue (up 26% from year-ago levels) and earnings. Morgan Stanley points out that Google grew its mobile search by 44%, grew YouTube by 32% and even managed to grow desktop search 12%. Just as important, traffic acquisition cost—essentially marketing expenses—fell as a percent of revenue for the first time in almost 2 years. Alphabet was fined—and finally paid--$5.1bil for anti-competitive behavior by the European Union, but since it is a one-time event, investors are largely ignoring it.  
 


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