Will the Fed? Won’t the Fed? Uncertainty Pushes Stocks Lower

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The tape was heavy on Tuesday as stocks react negatively to the ongoing pressure hitting government bonds, especially long-term Treasury bonds. That’s pushing yields up — despite the Fed’s ongoing reluctance to raise rates — on increasing inflation expectations and lingering hopes of a second-half bounce in GDP growth.

Breadth is breaking down here in a worrisome way, setting up a potential short-term correction that will be reversed once the Fed holds off on rate hikes at its June 17 policy announcement and press conference. The Fed’s economic projections will be updated then as well.

The uncertainty of this outcome is likely playing a role in the risk-off sentiment as well.

In the end, the Dow Jones Industrial Average lost 0.8%, the S&P 500 lost 1.2%, the Nasdaq Composite lost 1.6%, and the Russell 2000 lost 1.4%.

dow jones

Technically, the Dow Jones is at risk of dropping down and out of its tight three-month trading range; which is itself trapped within a long sideways pattern going back to the rebound out of last October’s big selloff.

The 18,000 level — which was first passed to great fanfare back in December — has proved an intractable obstacle for the bulls. They’ve had six months to break free. Now, it looks like the bears are about to take control again.

On the economic front, the trade deficit unexpectedly widened to -$51.4 billion in March, up from a $35.9 billion deficit in February and the worst result in seven years. This is the expected result of the dollar’s recent strength, which increases the price of U.S. exports globally rendering them less competitive.

The data pushed estimates of Q1 GDP growth into negative territory.

And finally, there are tremors out of both Asia and Europe as Greek and Chinese stocks sold off overnight. China’s Shanghai Composite fell 4.1% on reports banks are tightening margin requirements — the latest sign officials are trying to contain the froth in the Chinese stock market.

Greek shares dropped 3.9% while its bonds came under pressure on headlines that the International Monetary Fund could pull its funding support if the European establishment doesn’t grant Athens debt relief. There has also been a lot of chatter about the rise in eurozone government bond yields, with the German 10-year yield pushing over 0.5% after touching a record low of 0.05% less than two weeks ago.

Again, rising inflation expectations seem to be playing a role here — threatening an unwinding of very crowded trades in the fixed income markets.

hyg etf

High-yield corporate bonds are looking vulnerable in all this. A selloff in this area will weigh on stocks in a big way via all kinds of linkages such as the flow of debt-funded share buybacks, interest expense, and more.

OIH

In response, I’ve recommended my clients start booking profits and moving to a more neutral footing. Edge subscribers closed a 9.4% gain in the Market Vectors Oil Services ETF (NYSEARCA:OIH), which benefited from the rebound in crude oil. West Texas Intermediate gained 2.3% to close above $60 a barrel for the first time since December — a 42%+ rise from the March low of $42.41 a barrel.

Edge Pro subscribers closed a number of May call option positions including a 292% gain in Freeport McMoRan Inc (NYSE:FCX) and a near 50% gain in Hewlett-Packard Company (NYSE:HPQ). They’re still holding a 117% gain in their Bank of America Corp (NYSE:BAC) $16 calls, mentioned in a recent post, with an anticipated trade exit within the next couple of days.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/will-the-fed-wont-the-fed-uncertainty-pushes-stocks-lower/.

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