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Market Update

Treasury Yields Touch Record Lows as Safety Trade Intact Ahead of July 4

July 1, 2016

(Friday Market Open) U.S. Treasury bond yields continue to crater, and remain in sharp focus as the markets approach a three-day holiday weekend. U.S. 10-year and 30-year bond yields fell to record lows early Friday.

Markets are closed Monday for the July 4 Independence Day holiday, and a quiet, holiday-type trade might be ahead Friday.

The weakness in yields came even as equities charged ahead the last few days. The S&P 500 Index (SPX) is nearly back to where it was before the Brexit vote. Someday in an economics textbook, this might end up making a good example of how it takes five days for news like this to work its way through markets.

One possible reason for the quick recovery may have been hopes that central banks would keep monetary policy loose. U.S. 10-year Treasury yields fell below 1.4% early Friday, and the German bund yield stayed negative. Remarks by Britain’s central bank chief that more interest rate cuts may be needed this summer appear to be the instigator of the latest drop in yields.

The three-day stock rally may also reflect some “window dressing” as the quarter ended, with fund managers squaring positions. Sometimes this happens around the end of a quarter, and it could be interesting to see if there’s pressure next week once the holiday is out of the way and quarter-end trading is over.

With bond yields diving, the 10-year Treasury bond yield remains well below the dividend yield of the S&P 500 Index (SPX). That’s been the case for a while, but even more after the last few days. When bond yields fall below dividend yields, it often causes investors to move money into dividend-yielding stocks in a hunt for yield.

But the bond market continues to hold up well, and that may reflect that for many investors, it’s not so much about making money, it’s about keeping money. That generally means safety is getting valued more than yield, at least by some. So some people are turning toward government debt, and at the moment, U.S. yields are the highest around. That could keep pressure on Treasury yields in the near future.

Some point to gold as a possible way to make money in these low interest rate times, and certainly when events like Brexit occur, there’s typically a rush toward gold. That’s what happened last week when gold soared above $1,300. Gold remains near one-year highs.

While gold continued to soar, oil came under pressure early Friday amid easing supply concerns, as both Canadian and Nigerian production appear to be recovering, analysts said.

On the Fed front, Loretta Mester, Cleveland Fed President, is due to speak at 11 a.m. ET in London.

It’s important to keep an eye on volatility as the session draws to a close, considering a three-day weekend is ahead. The VIX index, a closely watched “fear gauge,” is down sharply early Friday to below 16, but if investors decide to seek protection ahead of the weekend, that could change in the last 45 minutes or so of the U.S. trading day. There’s an old Wall Street saying, “Never sell a dull market.” Will investors heed those words as the holiday weekend approaches?

S&P 500


The S&P 500 (SPX), plotted through Thursday on the TD Ameritrade thinkorswim platform, moved within 15 points of its last pre-Brexit close, climbing through resistance. The next resistance is at the psychological 2100 level, and above that is last week's high of 2113. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Mondelez Offer Doesn’t Stack Up For Hershey: Mondelez (MDLZ) knows chocolate, as it already makes a rather well known brand of chocolate sandwich cookies. So when it proposed a deal with Hershey (HSY) to potentially create a snacking giant offering a wide assortment of tasty treats, investors sent HSY shares rallying more than 15% Thursday. Hershey has long been seen as a takeover target. But Hershey Trust, which holds 8.4% of the famous company’s common stock and 81% of its voting power, rejected the $107 per share offer just hours after it was announced. The rejection came even though MDLZ promised to locate its global chocolate headquarters in Hershey, Pa., and rename the company Hershey, The Wall Street Journal reported.

Chicago PMI Back in Positive Territory: The Chicago Purchasing Managers Index (PMI) surged in June, rising 7.5 points to 56.8. Anything above 50 indicates improving conditions. New orders rose to the highest level since October 2014, and the overall index reached its highest level since January 2015, coming after two months of falling headline numbers in April and May. The Chicago PMI followed strong data on consumer confidence and personal spending earlier this week, a series of indications that the economy appears to remain strong. Later today come two more key economic indicators, with construction spending due this morning and June auto and truck sales scheduled for early afternoon.

A Tale of the Twos From Bullard: U.S. economic growth? Around 2%. Inflation? Around 2%. That was the forecast St. Louis Fed President James Bullard gave in a speech Thursday, according to media reports. "I do not think of the current regime as pessimistic. Output grows at the trend pace of 2%, but the unemployment rate remains quite low, and inflation remains at 2%. In addition ... growth could improve if productivity growth improves," Bullard said. Bullard continued to sound dovish as he predicted no more than one rate hike through the remainder of the year and nothing more than that through 2018. What a turnaround from a couple months ago when Fed officials were warning of summer rate hikes, but then again, that was before the May jobs report and Brexit.

Good Trading,

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