Treasury yields finished up across the curve today with the largest declines seen in the longer maturities. The benchmark 10-year Treasury finished the day yielding 2.9609%, up 5.59 basis points. Surprisingly, 5-year issues saw their yields rise only 3.91 basis to 1.6371%. Especially in light of the recent rally in this particular maturity, the relatively modest price decline on the day suggests to me that while there may have been some asset rotation among the markets today there is still a fair amount of pessimism out there that is keeping Treasuries fairly well bid. Commodities, on the other hand, shook off the deflation concerns that shrouded the sector last week and rallied across the board. Crude oil, in particular, rallied over 3%, or $2.50 per barrel, to a new near term high close of $81.46. With this move, crude has moved above the upper bound of its recent trading range (see chart below) and appears poised to challenge the $90 level once again. Weakness in the U.S. Dollar (Dollar Index down 0.76% on the day) added additional fuel to the commodity rally.
A positive Eurozone Purchasing Managers Index (PMI) reading of 56.7 (any reading above 50 indicates growth in business activity) caused the surge in Continental equity markets overnight that helped to buoy the early trade state-side. This reading continued the positive economic data coming out of Europe of late and helped to further ease some of the lingering concerns about the region’s economic prospects. While certainly a positive development, Europe’s longtime economic powerhouse, Germany, was again responsible for the lion’s share of the indexes improvement as its reading grew to 61.2 from June’s reported reading of 58.4. Countries like Italy and Spain posted modestly improved readings while France noted a decline from 54.8 to 53.9. This asymmetric growth within the region is at least an area for concern going forward as any slowdown in the German economy could severely crimp economic performance. It also implies that individual EU members will continue struggling with their sovereign debt commitments as economic growth (and tax revenues) remains stagnate. As such, Germany will one again be looked upon as the savior of Europe should liquidity and solvency again threaten individual member states.
Strangely, slowing PMI readings out of China were largely taken as a positive sign by investors as it raised the prospects of the Chinese government adopting more stimulative policy measures. While certainly a possibility, China’s continued double digit economic growth rate is still among the highest in the world, which places a limit on the amount of stimulus leaders would be inclined to implement. That said, this sort of reaction to a negative economic reading is yet another indication, in my opinion, that investors are a little too willing to simply run with the longer-term China ‘story’ rather than objectively evaluate the economic realities on the ground. For example, just last week, U.S. equity markets looked upon the improved Chicago PMI data as a non-starter. I suppose this reduced the likelihood of additional stimulus in the U.S., hence the lack of a rally. Call me crazy, but I’d rather be buying into strengthening economic readings rather than deteriorating ones. Confusing to say the least.
While equity indices were up across the board today, I did notice that the Dow Jones Transportation Average under performed the S&P’s by about 0.4% on the day. Typically a leading indicator of equity prices, I would like to have seen the Transports move in a manner more equal to the broader averages to further confirm the rally. That said, the Transports did manage to put in their highest close in May 14th, which is certainly a bullish development. Taking out the recent high of 4,515.35, though, will be the next hurdle that will need to be cleared for this market to continue higher (see chart below). I wouldn’t be surprised if we challenge this level during tomorrow’s session, but, as always, how the index closes will tell us more about the level of positive sentiment that is truly behind this rally. And with economic data on the horizon that is likely to paint a less than perfect image of the domestic economy, I suspect it’ll be a few more days until the market is able to mount a true assault on this price level. In fact, a few sessions of slightly lower to sideways action would actually improve my bullish outlook since a vertical move higher would imply an unsustainable rally that would be very short in nature. We’ll see how if plays out soon enough.
On Friday I implored the markets to start moving and, apparently, they listened. While the near term bull vs. bear debate is still yet to be decided, things are definitely moving in the bull’s favor after today. I continue to hold my long IYT (Transports ETF) position, but feel a little less comfortable in it due to today’s under performance. But as they say, ‘one day doesn’t make a trend.’ Today’s action in the Euro was pretty interesting as it appears to have broken above some critical resistance levels, so I’ll be keeping a close eye on this market. If confirmed, this Euro rally could provide further confirmation of the move higher in domestic equity and commodity values. I’ll provide an in-depth look at the Euro’s technical picture tomorrow, so be sure to stay tuned for that. With the week off to a rip roaring start, I’ll be curious to see what else is in store. If nothing else, this certainly adds a great deal of interest to the markets as well as plenty of fodder for comment here. You’ve got to love that. Until tomorrow......
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