[Chart courtesy of MarketWatch.com]
Equities trimmed losses Wednesday with the broad market closing near flat after the minutes from the Fed’s last meeting showed many policy makers favored another round of monetary stimulus if the economy failed to show signs of a durable pick up.
The Dow Jones Industrial Average closed 31 points lower after sinking as much as 83 while breadth within the index remained positive with 16 of the blue-chip index’s 30 components closing higher.
A report released by the National Association of Realtors showed existing home sales rose 2.3 percent in July, diminishing chances of QE3 as economic indicators continue to strengthen. So, here we go again as a mixed plate is being served up but hope remains among the QE addicts that the spiked punch bowl will remain on the menu.
Interestingly, the benchmark 10-year Treasuries dropped the most in nearly three months, after details from the Federal Open Market Committee’s last meeting on July 31-Aug 1 showed members favoring another round of quantitative easing unless growth picks up.
The S&P 500 has risen more than 11 percent since June 1 strictly on the possibility of further monetary stimulus speculation. The benchmark 10-year yield sank 11 basis points to 1.69 percent while yield on 30-year Treasury bonds crashed 10 basis points to 2.80 percent, the biggest intraday slide since July 2.
The greenback weakened Wednesday following the release of FOMC minutes that showed an interest-rate hike may be delayed further even as the US central bank mulls further stimulus. The dollar index, an indicator of the greenback’s strength against a basket of six currencies, fell to 81.716 from 81.939 late Tuesday.
Meanwhile in Europe, stocks turned jittery as leaders prepare for a series of meetings starting Thursday when German Chancellor Angela Merkel meets French President Francois Hollande. Both the leaders are due to meet Greek Prime Minister Antonis Samaras separately over the weekend.
PM Samaras is expected to seek an extension to Athens’ steep deficit reduction target deadline. However, any formal change to the schedule will be made only after a decision has been reached in October whether to release the next tranche of bailout money or not.
However, extension to Greece’s reform program will depend upon the report submitted by the international troika of inspectors set to arrive in Athens in September, Eurogroup chief Jean-Claude Juncker said Wednesday.
The benchmark Stoxx Europe 600 index slipped 1.2 percent, its biggest single-session fall since early August. A Japanese trade report showed European exports plunged 25 percent in July, pushing Tokyo back to a trade deficit for the month. Energy stocks were the biggest drag on the index.
In Germany, automakers dropped the most, driving the DAX 30 index lower by 1 percent. In London, the FTSE 100 was pushed lower 1.4 percent by banks, miners and oil firms.
In the ETF universe, funds linked to homebuilders rallied over improved home sales data. The iShares Dow Jones U.S. Home Construction Index Fund (ITB) was one of the best performers, gaining 2.29 percent on the day as existing home sales came in at 4.47 million in July vs. 3.37 million in June. The State Street SPDR Homebuilders ETF (XHB) also rose, gaining 1.57 percent on the day.
Precious metals continue to be in focus with gold, silver and palladium futures rising today following hints of further QE. After yesterday’s rally in the mining ETFs, metal-related funds advanced today. The Invesco PowerShares’ DB Precious Metals Fund (DBP) rose 1.29 percent while the iShares Silver Trust (SLV) and the State Street SPDR Gold Trust (GLD) added 1.94 percent and 1.08 percent respectively.
The global economic slowdown is clearly underway with nothing to stop it. Europe accounts for about 50% of all exports, and the weak trade report out of Japan is just a warning of what’s coming. Should the central banks shift the next round of QE into overdrive, I think its effect will only be temporary as underlying structural issues are not being addressed.
Consequently, it’s wise to stay with the trend and follow your trailing sell stops as a market reversal is a virtual certainty; the timing of it just remains the big unknown.
Disclosure: No holdings