Bond market on verge of tripping a signal that could lead to sharp sell-off - MarketWatch

All the U.S. stock market seemingly does is set records, so let’s take a look at the world of bonds, where the bulls have been blasting yields lower.

MarketWatch’s call of the day comes from the Leuthold Group, a Minneapolis investment research firm, which tracks the correlation between weekly percentage changes in the S&P 500 SPX, -0.11%   and the 10-year Treasury yield TMUBMUSD10Y, +1.75% The correlation between the two flipped positive in the late 1990s, perhaps because of the global economy’s bias towards a decrease in the rate of inflation that stems from rapid technological change and globalization in trade.

Right now, the correlation between the two is at what Leuthold calls an “extreme” level, prone for reversal and, according to the analysis, near a top. Those peaks have identified eight of the last nine best times over the last 18 years to sell bonds. Yields have spiked by an average of 45 basis points in the 13 weeks following a correlation sell signal.

But what would a peak in correlation mean for stocks? Apparently little, according to the Leuthold analysis — “the bias has been for somewhat below-average equity returns in the 4-week, 13-week, and 52-week periods following a definitive correlation peak.”

As long as we’re on the topic, DataTrek Research points out the average S&P sector correlations are at 8-month lows, due to market confidence of future dovish Fed policy and that the belief that long-term bond yields will continue to decline. Correlations between U.S. large caps and developed economy non-U.S. equities and emerging market stocks are also falling — which DataTrek attributes to the U.S.-China trade war, and its impact not just on Asia but the big export-oriented eurozone economies.

The market

Dow YMU19, +0.06% S&P ESU19, +0.02%  and Nasdaq NQU19, -0.01%   futures edged a bit higher Tuesday morning. The Dow Jones Industrial Average DJIA, -0.07%   closed Monday with its fourth record high of the year, a relatively small gain of 27 points to 27359.16.

Gold GCQ19, -0.10% rose $2.30 to $1,415.80 an ounce, oil CL.1, +0.05%  fell 4 cents to $59.54 a barrel and the dollar DXY, +0.38% rose 0.3%.

Europe stocks SXXP, +0.27% inched higher, while the Asia Dow ADOW, +0.04% finished with little change.

The chart

How low are expectations heading into second-quarter earnings season? Cyclicals, companies that sell more discretionary items during boom times but less during a recession, are expected to post the worst earnings growth in eight years.

Cyclicals are expected to post the worst earnings’ growth in eight years pic.twitter.com/Yn6aVEb4JK

— Daniel Lacalle (@dlacalle_IA) July 16, 2019

The buzz

Just a day after Treasury Secretary Steven Mnuchin gave a tentative thumbs-down to Facebook’s FB, +0.04%  Libra cryptocurrency, the Senate Banking Committee will hold a hearing, followed Wednesday by the House Financial Services Committee, where lawmakers of both parties are giving a skeptical reception to the online giant’s plans.

Mnuchin made quite a bit of news at that rare White House press briefing, saying that they’re getting closer to raising the debt ceiling and that he and U.S. Trade Representative Robert Lighthizer may travel to Beijing for trade talks if phone conversations prove fruitful.

It’s a big day for bank-sector earnings with JPMorgan Chase JPM, -0.70%  reporting second-quarter earnings that beat forecast, but trimming its net interest outlook for the year. Goldman Sachs Group GS, +0.90%  also beat. KeyCorp KEY, -1.56%  meanwhile said it’s on the hook for up to $90 million after a business customer ripped them off.

Blue Apron APRN, +8.36%  rallied in premarket trade after the company said it will add Beyond Meat BYND, +1.39%  recipes to its repertoire.

On the economic front, retail sales for June jumped 0.4%, or a gain of 0.7% excluding autos and gas. Import prices plunged, while industrial production data is due at 9:15 a.m. Eastern. A number of Federal Reserve officials, including Chairman Jerome Powell, are due to speak.

The tweet

Yes, the astronauts on board Apollo 11 had to file a customs form.

Apollo 11 U.S. Customs form after first moon landing by astronauts, 50 years ago: pic.twitter.com/ARYxgg07pk

— Michael Beschloss (@BeschlossDC) July 16, 2019

Random reads

New Zealand police cracked down on vagrants — vagrant penguins, that is. Recidivists, too, per the report.

This horrific video of a passenger changing his movie screen by foot is making the rounds on Twitter.

Good news for the Philadelphia Eagles — the new Madden 20 game by Electronic Arts EA, -0.51%  projects them to be the best NFL team this year. The coders think the Miami Dolphins will be the worst.

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https://www.marketwatch.com/story/bond-market-on-verge-of-tripping-a-signal-that-could-lead-to-sharp-sell-off-2019-07-16

2019-07-16 12:38:00Z
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