Treasuries Rule – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

The earnings parade continues this week as some leading retailers headline quarterly results. Home Depot, Target, TJX and Walmart will be reporting, giving investors and traders a pulse of the coming market. Also due up is the July retail sales report, coming Tuesday morning. Wednesday afternoon the Fed will release its minutes from the July meeting. A strong advance by the tech sector nudged the market higher Monday. Bond yields weakened early A.M., giving techs an opening. The Nasdaq closed the day up 1%, while the S&P 500 and Dow Jones Industrial Average were up 0.6% and 1.0% respectively. The 10-year ‘benchmark’ U.S. Treasury note ended the day at 4.18% after a roller-coaster session, finishing at a high of 4.215%. It appeared U.S. traders and investors were not overly concerned about China’s worsening economic woes. Stocks were weaker on Wednesday as the market opened, wavering and finally ending the session lower, with the DowJones Industrial Average losing 180 points. The market is overly concerned regarding the July Fed minutes being released, revealing the members inner thoughts regarding ongoing inflation and the goal of reaching 2%, as the July meeting brought forth stubborn inflation figures that required extended rate hikes. Also expressed at the last meeting were concerns by the Central Bank that with inflation running hot, more regional and smaller banks could encounter fiscal headwinds. Even with the U.S. anti-recession economy chugging along, defying doomsdayers, these fiscal concerns hobble the banking sector, putting the brakes on banks, exposing them to the interest rate quagmire. Again, Thursday stocks had many reasons to be positive, however all three indexes lost ground, unable to sustain any kind of a rally. After three straight losing sessions, August is beginning to look more like the ‘bear’ is coming out of early hibernation. Also, as China’s worries seem to be compounding, U.S. markets are reacting more negatively, as many domestic investors are vested in Chinese securities. Treasury yields were strong, hovering a bit below 4.3%, not giving investors and traders much to ‘crow’ about. The 10-year treasury yield hit the highest level since 2008, at 4.258%, up from Tuesday’s 4.220%. As expected, all three indexes slide with the Dow Jones Industrial Average off 181 points. Brent Crude futures continued this week’s slide to $83.45 a barrel, down 3.9% this week, after reaching $84.88. Hong Kong’s Hong Seng Index continued soft, as major Chinese economic concerns continue to compound. Add in the major financial losses and property devaluations Hong Kong has endured (the taking control of Hong Kong, and exodus of nearly every major U.S. bank), has contributed to the economic disarray now facing the Chinese government.

Political uncertainty in Argentina has contributed to serious financial woes, with an already unstable government and a fragile financial sector. The Argentine Central Bank has severely devalued the dollar bond and the peso. The dollar bond fell 14%, while the peso skidded 20% in the past 10 days, valuing a ratio of 350 to the U.S. dollar. Many world wide economists have billed the economic crisis as Argentina’s worst since the 2001 financial disaster. With inflation running at 116%, it is nearly impossible for families to put food on the table, let alone dealing with shelter. The average Argentinian is struggling with insurmountable chaos, losing the battle every day.

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Jason Fichtner, chief economist at Bipartisan Policy Center, a Washington, D.C.-based think tank, IBD, IBD “With the U.S. experiencing the greatest retirement surge in its history, the country’s public and private-sector retirement systems have become obsolete. The old metaphor of the three-legged stool of retirement planning-employer pensions, personal savings and Social Security-no longer holds,” Mr. Fichtner said.

Richard Bernstein, financial analyst, Barron’s “Any form of excessive inflation-real or financial-damages the economy because there is ultimately a gross misallocation of capital,” Bernstein argues. “Does the U.S. economy really need Elon Musk going to Mars or Richard Branson taking space vacations?”

Michael Arone, chief investment strategist at State Street Global Advisors, Barron’s “The bears are finally throwing in the towel, and we are now beginning to see some examples of FOMO,” said Mr. Arone. “As that happens, I get increasingly more anxious.”

David Donabedian, chief investment officer at CIBC Private Wealth US, Barron’s “[It’s an] appropriate pause by the market,” Mr. Donabedian said, making a distinction with the rally led by a handful of tech names earlier this year. “We’re now seeing a healthy market.”