The exception to the bright green market today was the financial sector (-0.5%).
Concerns about a flattening yield curve are getting some publicity today for the weakness. The 10Yr-2Yr spread has narrowed to 14 basis points while the 10Yr-3Mo spread has narrowed to 26 basis points.
The narrowing spread is seen as a a major pressure for net interest margins for lenders that borrow at short rates and lend at long rates.
Other potential influences for the underperformance include the following:
Multiple downgrades for financial sector components:
Lazard (LAZ) downgraded to Underperform from Peer Perform at Wolfe Research
Northern Trust (NTRS) downgraded to Underperform from Peer Perform at Wolfe Research
SunTrust Banks (STI) downgraded to Hold from Buy at Jefferies
U.S. Bancorp (USB) downgraded to Hold from Buy at Jefferies
Wells Fargo (WFC) downgraded to Peer Perform from Outperform at Wolfe Research
Invesco (IVZ) downgraded to In-line from Outperform at Evercore ISI
JPMorgan Chase (JPM) downgraded to Hold from Buy at Jefferies
Moody's (MCO) downgraded to Underweight from Equal-Weight at Morgan Stanley
Aon (AON) downgraded to Neutral from Buy at Goldman Sachs
Principal Fincl (PFG) downgraded to Neutral from Buy at Goldman Sachs
In addition to the above, JPM CEO Jamie Dimon told FOX Business this morning that it looks to him as if economic growth is slowing. That said, Dimon added, that inversion of the yield curve does not worry him and that he does not believe there will be a global recession.
The Financial Select Sector SPDR ETF (XLF 24.17, -0.12) is down 0.5%, versus a 0.8% gain for the S&P 500. It’s three largest holdings were all down:
Bank of America (BAC 25.27, -0.29, -1.1%)
Berkshire Hathaway (BRK.B 195.60, -1.31, -0.7%)
JPMorgan Chase (JPM 100.21, -0.57, -0.6%)
I’d like to note that there was an aggressive 5000 contract call sweep in BAC today for $1.335M in total premium.
Last week, we got a breath of fresh air from Fed Chair Powell who assured us that the Fed will be patient with its policy approach. On Wednesday, we could learn if voting FOMC members Evans and Rosengren are like minded with their policy views.
Chicago Fed President Charles Evans Speech (Wednesday, January 9, 9:00 a.m. ET)
Boston Fed President Eric Rosengren Speech (Wednesday, January 9, 11:30 a.m. ET)
Both men are voters on the 2019 Federal Open Market Committee (FOMC), so their views have more market-moving influence than the views of non-voting FOMC members.
Market participants will be anxious to hear if one, or both, make a proclamation similar to the one recently made by Fed Chair Powell, who said the Fed is paying close attention to market signals and will be patient with its policy approach.
On October 12, Mr. Evans suggested he thought the neutral rate was in the 2.75-3.00% area (the fed funds target range is currently 2.25-2.50%). With the market sell-off in the interim and signs of slowing in the economic data, there will be some added attention to whether his perspective on the neutral rate has changed.
He will be speaking at Discover Financial Services in Illinois where there will be an audience Q&A.
On October 1, Mr. Rosengren said he believed the Fed would likely need to move interest rates gradually from a mildly accommodative stance to a mildly restrictive stance in order to best fulfill the Fed's mandate. He noted, however, that if downside risks became more germane to the outlook, a different policy path would be warranted. Wednesday's speech will provide an opportunity to update listeners on his policy view.
He will be at the Boston Economic Club speaking about the economic outlook.
Dovish-minded views shared by Messieurs Evans and Rosengren would solidify in the market's mind that the Fed is unlikely to raise the target range for the fed funds rate again anytime soon.
Their speeches will precede the 2:00 p.m. ET release of the minutes from the December FOMC meeting, so their views will be more current and more relevant since they were not voting members at the December meeting.
The following areas are apt to see increased trading activity based on the market's interpretation of their policy rate outlook:
Treasuries and related bond ETFs:
ProShares UltraShort 20+ year Treasury (TBT)
iShares 20+ Year Treasury Bond (TLT)
iShares 1-3 Year Treasury Bond (SHY)
Schwab Short-term US Treasury ETF (SCHO)
iShares iBoxx $ High Yield Corporate Bond (HYG)
SPDR Barclays High Yield Bond ETF (JNK)
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
iShares Floating rate Bond ETF (FLOT)
Rate-sensitive sectors like utilities, REITs, and financials and related ETFs:
Utilities Select Sector SPDR ETF (XLU)
iShares U.S. Real Estate ETF (IYR)
REIT ETF (VNQ)
Financial Select Sector SPDR ETF (XLF)
SPDR S&P Bank ETF (KBE)
SPDR S&P Regional Banking ETF (KRE)
SPDR S&P Insurance ETF (KIE)
iPath S&P 500 VIX ST Futures ETN (VXX)
ProShares Ultra VIX Short-Term Futures (UVXY)
Pro Shares Short VIX Short-Term Futures (SVXY)
ETFs and inverse ETFs for the major averages
SPDR S&P 500 ETF (SPY)
Short S&P 500 (SH)
Invesco QQQ Trust (QQQ)
Short QQQ (PSQ)
iShares Russell 2000 (IWM)
Short Russell 2000 (RWM)
SPDR Dow Jones Industrial Average ETF (DIA)
Short Dow 30 (DOG)
Fed funds futures