When a central bank just says “no”, investors run scared and sell stocks.
Trouble was already brewing ahead of Tuesday’s opening bell after Bank of Japan’s unwillingness to initiate any efforts to stabilize volatility of Japanese Government Bonds resulted in a surge in the ten-year U.S. Treasury yield to 2.26 percent. The jump in the ten-year Treasury yield scared investors who have been dreading life without quantitative easing.
Good news from the U.S. Department of Commerce that wholesale inventories rose only 0.2 percent in April, compared with 0.3 percent in March (indicating increased sales) combined with a better-than-expected reading on May’s Small Business Optimism Index to give stocks a mid-day boost. By 1:30 EDT, investor anxiety returned — as demonstrated by a surge in the Chicago Board Options Exchange volatility index — and stocks sank.
The Dow Jones Industrial Average (NYSEARCA:DIA) fell 116 points to finish Tuesday’s trading session at 15,122 for a 0.76 percent decline. The S&P 500 (NYSEARCA:SPY) finished Tuesday’s session with 1.02-percent drop to close at 1,626. The Nasdaq 100 (NASDAQ:QQQ) also sank by exactly 1.02 percent to close at 2,959. The Russell 2000 (NYSEARCA:IWM) dropped 1.13 percent to 981. In other major markets, oil (NYSEARCA:USO) declined 0.62 percent to close at $33.79.
On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by $1.28, or 1.23 percent, to $102.63/bbl. (NYSEARCA:BNO). August gold futures declined by $8.30, or 0.60 percent, to $1,377.70 per ounce (NYSEARCA:GLD). Transports backed into a tree on Tuesday, with the Dow Jones Transportation Average (NYSEARCA:IYT) declining 1.08 percent.
After the Bank of Japan’s two-day policy meeting concluded on Tuesday, BOJ Governor Haruhiko Kuroda announced that the nation’s central bank would not introduce any new stimulus measures to stabilize the recent volatility of Japanese Government Bonds. The ten-year JGB yield reached 0.89 percent on Tuesday. Although that may sound like nothing to Americans, it represents quite a spike from the 0.315 percent yield in April. Critics had hoped that the BOJ would extend longer fixed-rate loans to banks in attempt to tame JGB volatility.
The Bank of Japan’s decision sent the yen soaring to less than 97 per dollar. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). Although the Nikkei 225 Stock Average was in positive territory at the outset of Tuesday’s session, stock prices sank after Kuroda made his announcement. The Nikkei 225 Stock Average dropped 1.45 percent to 13,317 (NYSEARCA:EWJ).
Although European investors were spooked by the chaos in Japan, there were more pressing problems closer to home which helped boost consumption of antacid tablets to calm jittery stomachs. The German Constitutional Court is presently conducting hearings on a challenge to the legality of the nation’s participation in the European Central Bank’s Outright Monetary Transactions program.
The OMT program is the most crucial aspect of the so-called “Draghi put”, since it provides a backstop for Eurozone sovereign debt. If sovereign bond yields for a participating nation spike, the OMT program allows the ECB to intervene by purchasing bonds to reduce the yields. The program has been essential in resolving the European sovereign debt crisis. If Germany refuses to contribute to the OMT, the program will almost certainly die (NYSEARCA:VGK). The news sent Eurozone sovereign bond yields on a steady climb.
The Euro STOXX 50 Index finished Tuesday’s session down 1.33 percent to 2,683 – falling back below its 50-day moving average of 2,715. Its Relative Strength Index is 40.44 (NYSEARCA:FEZ).
In China, the Shanghai Stock Exchange was closed for the Dragon Boat holiday. In Hong Kong, the real estate sector was not alone in dragging down the stock index. The casino industry helped spoil the party on a day when internet heavyweight, Tencent Holdings advanced 1.1 percent. Hong Kong’s Hang Seng Index fell 1.20 percent to 21,354 (NYSEARCA:EWH).
Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,609 after closing at 1,626 — as bears hope that we could be watching the formation of a double-top pattern on the chart, which would signal a decline. Its Relative Strength Index fell from 54.23 to 48.38. The MACD remains below the signal line and both are on descending trajectories, suggesting the likelihood of a further decline.
For the day, all sectors were solidly in negative territory, with the financial and energy sectors taking the hardest hits with losses of 1.65 percent and 1.52 percent, respectively. The consumer staples sector escaped with the least damage, declining by 0.25 percent.
Consumer Discretionary (NYSEARCA:XLY): -0.99 percent
Technology (NYSEARCA:XLK): +1.04 percent
Industrials (NYSEARCA:XLI): -0.92 percent
Materials (NYSEARCA:XLB): -1.39 percent
Energy (NYSEARCA:XLE): -1.52 percent
Financials (NYSEARCA:XLF): -1.65 percent
Utilities (NYSEARCA:XLU): -0.66 percent
Health Care (NYSEARCA:XLV): -0.41 percent
Consumer Staples (NYSEARCA:XLP): -0.25 percent
Bottom line: Tuesday’s surge in ten-year and thirty-year Treasury yields rekindled investor nightmares about life without quantitative easing, sending the major stock indices southbound. Now may be the time for me to act on my idea to market little Teddy bears, designed to resemble Ben Bernanke, which can serve as “transitional objects” for anxious investors.
John Nyaradi is the author of The ETF Investing Premium Newsletter.
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