Friday, August 16, 2013

Stock Market Strains from Raging Bond Vigilantes

I have been pounding on the table saying that the rampaging bond vigilantes and $100+ oil prices are incompatible with rising credit fueled stock markets. 

Last Wednesday I wrote:
The stock markets operates on a Wile E. Coyote moment.These forces are incompatible and serves as major headwinds to the stock markets. Such relationship eventually will become unglued. Either bond yields and oil prices will have to fall to sustain rising stocks, or stock markets will have to reflect on the new reality brought about by higher interest rates (and oil prices), or that all three will have to adjust accordingly...hopefully in an 'orderly' fashion. Well, the other possibility from 'orderly' is disorderly or instability.
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Last night, yields of 10 year US Treasury Notes spiked by 43 basis points! (all stock market charts from stockcharts.com)

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The US S&P fell by 1.43%, but still remains above the 50-day moving average

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Meanwhile the Dow Industrials Averages broke the 50 day moving averages down by 1.47%.

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Yields of UK 10 year Treasuries likewise soared. The chart from Bloomberg has not been updated to include last night’s close

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UK’s FTSE 100 dropped 1.58% and appears to have formed a mini-head and shoulders.

Nonetheless the FTSE also still is above the 50 day mas

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Yields of 10 year German bonds also surged. 

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The German Dax fell by only .73%.

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Yields of 10 year French bonds also spiked, but ironically the CAC dropped by only .51%.

For technicians, the CAC earlier falsified what seemed as a head and shoulder formation but now appears to be in a steep rising wedge.

It may be true that two days of a downshift in stock market prices does not a trend make, but for me these represent as incipient transitional strains from the clashing forces operating behind the stock markets. 

Yet if the bond vigilantes continue to precipitately reinforce their presence, then expect the turmoil in global financial market to intensify. And the 'don’t-worry-be-happy-crowd' will be faced with their respective ‘black swans’.

Caveat emptor

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