The Daily Prophet: Stock Traders Surrender to a Hawkish Fed

Connecting the dots in global markets.

Minutes of the Federal Reserve's Jan. 30-31 meeting released Wednesday showed that policy makers  grew more positive on the economic outlook, citing “substantial underlying economic momentum.” So, of course, stocks fell. Wait -- what? 

The S&P 500 Index went from being up as much as 1.16 percent shortly after the minutes were released at 2 p.m. Washington time to ending down 0.55 percent. Rather than focus on the Fed's positive comments on the economy,  investors were more concerned about the prospects for a faster pace of interest-rate increases. The amount of Fed tightening priced into the overnight index swap curve for the next 12 months jumped to 74 basis points, the most since May 3, 2010, according to Bloomberg News' Matthew Boesler. There are already signs that higher borrowing costs may be starting to pinch, as existing home sales unexpectedly dropped in January to a four-month low. With the market still struggle to recover after falling 10 percent into a correction earlier this month, investors are more inclined to sell first and ask questions later than wait for evidence that the economy and corporate earnings are strong enough to withstand three -- and possibly four -- rate increases by the Fed this year. 

In a sign of how fragile the market is, through the last two weeks, the proportion of advancing shares on the New York Stock Exchange has stayed below 90 percent, a threshold sometimes referred to as “breadth thrust” that’s viewed by technical analysts as a sign of sustained advance, reports Bloomberg News' Lu Wang. That leaves the door open for a trip back to the lows, according to Russ Visch, a technical analyst at BMO Nesbitt Burns Inc. "Despite the amazing run-up in equities we’ve seen, none of the days qualify as a true breadth thrust,” Visch wrote in a research note. “In fact, it’s not even close.”

The bear market in bonds isn't just a Wall Street issue. The selloff that has sent benchmark Treasury yields to their highest since early 2014 may be starting to have an impact on the all-important housing market in the form of higher mortgage rates, which are the highest since 2014. A National Association of Realtors report Wednesday showed that sales of previously owned U.S. homes unexpectedly fell in January, dropping 3.2 percent to a four-month low. What's disturbing is that the median price in January was 41 percent higher than it was five years ago, far outstripping the 12.6 percent advance in average hourly earnings and showing how housing is becoming less affordable, according to Bloomberg News' Vince Golle. First-time buyers -- or those who typically rely most on financing -- made up 29 percent of purchases, down from 32 percent in December and 33 percent a year earlier, according to Bleakley Financial Group. "Granted, preferences for buying (versus) renting changes and families are being created later in life but it's also clear that many young households have been priced out of buying homes," Peter Boockvar, the chief financial officer at Bleakley, wrote in a research note.

The Bloomberg Dollar Spot Index managed to string together its fourth consecutive increase, its longest winning streak since the early December. After a brief wobble, the gauge gathered strength after minutes of the central bank's Jan. 30-31 meeting showed that policy makers grew more positive in their outlook, citing “substantial underlying economic momentum.” At least one major Wall Street firm believes the dollar is on the cusp of a rebound after depreciating 8.52 percent last year. The foreign-exchange strategists at Bank of America Merrill Lynch believe that those shunning the dollar for the euro and yen in anticipation of sifting policies at the European Central Bank and Bank of Japan may be disappointed by the scale and speed of changes, according to Bloomberg News' Lananh Nguyen. “The market could be wrong by pricing monetary policy convergence too early,” Athanasios Vamvakidis, a strategist at the bank, wrote in a research note. “We argue that inflation in the U.S. will increase this year, most likely above what markets expect, and that this will be positive” for the dollar.

Investors in South Africa hit the trifecta on Wednesday, as the nation's stocks, bonds and currencies all gained as the nation's new president announced plans to raise sales taxes and curb spending to stabilize debt and prevent another credit rating downgrade. Yields on benchmark government securities dropped to their lowest since May 2015 on Wednesday, or 7.98 percent. The rand rose more than any other currency against the dollar, strengthening as much as 1.24 percent. The FTSE/JSE Africa All Share Index climbed as much as 0.8 percent. Moody’s Investors Service and S&P Global Ratings responded positively to the decisions, Treasury Deputy Director-General Monale Ratsoma told Bloomberg News. “They were very positive,” Ratsoma said in an interview in Cape Town on Wednesday after a team from the Treasury held teleconferences with Moody’s and S&P. “They indicated areas of concern after the medium-term budget policy statement and I think they must agree we’ve addressed all of those.” Cyril Ramaphosa was elected president last week, a day after his party forced Jacob Zuma to quit following a scandal-marred nine-year tenure when economic growth stagnated, according to Bloomberg News' Arabile Gumede and Mike Cohen.

A measure of 30-day volatility in gold futures climbed this week to the highest in more than a year as swings in the dollar, higher bond yields and speculation about the pace of U.S. interest-rate hikes rattle investors, according to Bloomberg News' Susanne Barton. Bullion plunged Tuesday by the most since July after posting the biggest weekly gain since 2016 on Friday. “Unless we have a clear view -- if we are going to get three or four interest rate hikes this year -- investors are going to remain nervous,” said Naeem Aslam, chief market analyst at TF Global Markets in London. In other gold news, Russia has overtaken China as the fifth-biggest sovereign holder of gold, allowing it to diversify its foreign currency holdings amid a deepening rift with the U.S., Bloomberg News' Eddie van der Walt reported. The Bank of Russia increased its holdings in January by almost 20 metric tons to 1,857 tons, topping the People’s Bank of China’s reported 1,843 tons. While Russia has increased its holdings every month since March 2015, China last reported buying gold in October 2016. The U.S. is still the largest owner of gold, with 8,134 tons, much of it stored in Fort Knox.

Next up, the ECB, which will release the minutes from its Jan. 24-25 meeting on Thursday. Although policy makers didn't raise rates then, ECB President Mario Draghi said at a press conference at the time that an increase this year is very unlikely. That was a minor surprise, given how well the euro zone economy has performed in recent months. Just a couple of days before the meeting the IMF boosted its 2018 growth forecast for the region to 2.2 percent from 1.9 percent. The Bloomberg Euro Index, which tracks the shared currency against its major peers, has risen more than 12 percent from its low last year in April. So, was Draghi underplaying the chances of a rate increase this year? Perhaps the minutes will provide the clues.

If you’d like to get The Daily Prophet in e-mail form, right in your inbox, please subscribe to this link. Thanks!

Too Much is Being Made of the Bearish Bond Data: David Ader

Five Fed Rate Hikes in '18 Isn't A Crazy Idea: Charles Lieberman

Small-Business Sentiment Is No Help to Investors: Barry Ritholtz

Europe Needs More Than Just Risk Sharing: Ferdinando Giugliano

A Strong U.S. Economy Can Be Tough on Immigrants: Conor Sen

    Before it's here, it's on the Bloomberg Terminal.