Opening Bell: Global Stock Rally Fades; Technicals Weigh On Yields

Key Events

The post-Christmas global stock rally showed signs of losing steam this morning, as European shares and futures contracts on the S&P 500, Dow and NASDAQ 100 tracked Asian equities lower.

Today's setback occurred despite the three tailwinds that had helped the previous upward push remain intact: a dovish shift in the Fed's interest rate trajectory, a de-escalation of the US-China tariff dispute and last Friday's upbeat US employment report. Historically, government shutdowns like the one currently taking place in the US don’t justify an equity decline. That leaves us with the simple explanation that the current rally is nothing more than a correction within a downtrend, as we've previously argued and as the S&P 500 chart (pictured lower) exemplifies.

The STOXX 600 wiped out Wednesday’s gains, dragged down by carmakers, which just yesterday had outperformed on positive US-China trade talks sentiment. Technically, prices are falling after yesterday’s trading developed a shooting star, a candle whose bearish implication is reinforced by a cross-road of technical triggers: the October-November support turned resistance, the 50 DMA and the top of a falling channel.

In the earlier Asia open, most regional benchmarks weakened despite a softer dollar and optimism surrounding diplomatic talks between the world’s two largest economies. Japan’s Nikkei (-1.29%) underperformed, dragged down by the Retail, Chemical and Electrical/Machinery sectors. Australia’s S&P/ASX 200 was the best performer, rising 0.29 percent. Hong Kong’s Hang Seng (+0.24%) advanced again while the mainland’s Shanghai Composite (-0.36%) slipped lower.

Perhaps a strengthening yuan was weighing on stocks, after the currency reached the strongest level since August, as the short-term USD/CNY pattern shifted downward. Obviously, this is helpful for trade negotiations, as US President Donald Trump complained repeatedly about a weak Chinese currency.

Global Financial Affairs

In yesterday’s US session, equities extended the rebound from the end-of-year bottom as Fed minutes revealed a more dovish tilt than expected. However, optimism was partially offset by the second-longest government shutdown in history, which entered its 19th day on Wednesday. If Trump and US lawmakers fail to reach an agreement on Saturday, we will witness the longest government shutdown in history.

Adding to ongoing political tension, the US president stormed out of a meeting with Congressional leaders yesterday when House Speaker Nancy Pelosi reiterated she would not fund a border wall.

The S&P 500 closed 0.41 percent higher, with Energy (+1.58%) the obvious leader as it tracked oil prices higher after WTI returned to a bullish market. Technology, the usual leading sector, advanced 1.29 percent. Defensive sectors Consumer Staples (+-0.93%) and Utilities (-0.6%) lagged, as well as interest rate sensitive Real Estate (-0.41%). It may appear counter-intuitive that the sector which holds a negative correlation with interest rates should fall after surprisingly dovish minutes were published. The answer may lie in the famous Wall Street adage “buy the rumor, sell the news.” Investors appear to think the reduced interest rate outlook is already priced in.

The Dow Jones Industrial Average inched 0.39 percent higher.

The NASDAQ Composite gained 0.87 percent. The Russell 2000 also climbed 0.87 percent, outperforming, once again, despite market structure suggesting it should underperform, as hopes for a US-Sino resolution should make small-cap stocks unattractive compared to their large-cap counterparts, who stand to gain the most from easing tariffs.

Is this negative divergence a signal investors lack faith in the US-China negotiation process, or perhaps an outright dismissal of the trade dispute as a key headwind in the current market climate?

The yield on 10-year Treasurys fell for a second day after it reached the downtrend line since early November, when yields hit the highest level since May 2011. Recently, the 50 DMA crossed below the 200 DMA, triggering a Death Cross.

The dollar sold off, slipping 0.78 lower, after Fed minutes confirmed the central bank's resolve to slow down the pace of interest rate hikes. Technically, the greenback finally topped out completely, as it has been signaling for weeks.

It is noteworthy that the minutes projected a different picture than what emerged from Chair Jerome Powell’s speech. Central bankers seemed to acknowledge a lack of clarity after the last vote for a rate hike, and seemed less eager to press on with further increases until inflation ticks higher. The message was in stark contrast with Powell’s “automatic pilot” comment regarding normalizing the Fed's balance sheet. The minutes makes sense in the post-market turmoil reality. They seem almost fine-tuned to new market expectations.

Oil gave up 2 percent this morning on rising US supply, though it later re-gained some ground. The early drop marked the first correction after eight straight days of gain—the longest rally in one and a half years, with supply cuts and the broader market's risk-on shift prompting a 5.18 percent surge. Technically, supply overcame demand at the 50 DMA and the downtrend line since December 4, after crossing above the downtrend line since October 3, when it reached the highest levels since mid-November 2014. However, it blew out a rising flag (red), bearish in a downtrend, suggesting further rallies.

Up Ahead

• Fed Chairman Powell will speak to the Economic Club of Washington D.C. on Thursday.
• Britain’s Parliament this week resumes a debate on the Brexit withdrawal bill, with Prime Minister Theresa May seeking to avoid defeat in a vote set for the week of January 14.

Market Moves

Stocks

• Futures on the S&P 500 declined 0.8 percent , the first retreat in a week.
• The Stoxx 600 gave up 0.8 percent, the biggest fall in a week.
• The UK’s FTSE 100 lost 0.6 percent, the largest fall in a week.
• Germany’s DAX fell 0.9 percent, the biggest fall in a week.
• The MSCI Asia Pacific Index dropped 0.1 percent, the first retreat in more than a week.
• The MSCI Emerging Market Index climbed 0.2 percent to the highest in five weeks.

Currencies

• The Dollar Index increased 0.2% percent to the lowest in 2 months.
• The euro climbed 0.1 percent to $1.155, the strongest in more than 12 weeks.
• The British pound dipped 0.2 percent to $1.2768.
• The Japanese yen gained 0.3 percent to 107.88 per dollar, the strongest in a week.

Bonds

• The yield on 10-year Treasuries fell three basis points to 2.68 percent, the largest fall in a week.
• Germany’s 10-year yield slipped two basis points to 0.26 percent, the first retreat in a week and the biggest tumble in more than a week.
• Britain’s 10-year yield slid four basis points to 1.226 percent, the lowest in a week on the largest tumble in more than a week.
• The spread of Italy’s 10-year bonds over Germany’s rose five basis points to 2.6482 percentage points.

Commodities

• Gold rose 0.2 percent to $1,296.39 an ounce, the highest in seven months.