Stocks and bonds under Fed pressure

MGN Online
Monday, May 13, 2013 - 7:00pm

 The jokes about QE Infinity may come to an end soon.

The Federal Reserve and its bond buying program were a hot topic Monday, following a Wall Street Journal report over the weekend that said central bank officials are considering an exit strategy for the massive stimulus measures that have been fueling the economy since late 2008.

Currently, the Fed buys $85 billion a month of mortgage-backed securities and Treasuries. And just last month, the central bank said it stands ready to either "increase or reduce the pace" of those purchases in response to economic activity.

"The article does not say that the Fed will start tapering the pace of bond purchases immediately, but it provides a window into sentiment at the central bank," said Zach Pandl, senior interest rate strategist at Columbia Management. "Faced with conflicting information on the economy, Fed officials have decided to see the glass as half full. They are thinking about the exit, not about how to do more."

The fear that the Fed may begin to unwind its loose monetary policies sooner rather than later put pressure on U.S. Treasuries, with the 10-year yield spiking to a nearly two-month high of almost 1.96%. Just a month ago, yields were hovering around 1.6%. Treasury prices and yields move in opposite directions.

Meanwhile, the Dow Jones industrial average drifter lower, while the S&P 500 and Nasdaq were flat.

The Fed's policies have been widely given credit for boosting stocks over the last few years.

As investors debate the Fed' next moves, here are five more things to watch:

1. Stocks remain near record highs as valuations creep up. While stocks retreated Monday, both the Dow and the S&P 500 finished last week at record closing highs. The Nasdaq touched its highest level since November 2000 before pulling back.

With stocks up so sharply, valuations have also crept higher. At its closing high last week, the S&P 500 traded at more than 16 times 2012 earnings, the highest P/E ratio in three years according to Eddy Elfenbein of Crossing Wall Street.

However, stocks are still trading at less than 15 times 2013 earnings estimates.

2. Retail sales unexpectedly rise: Retail sales edged higher in April, as strong car sales and spending on building supplies helped make up for weakness in other sectors. Economists had expected sales to decline.

Mark Luschini, chief investment strategist for Janney Montgomery Scott, said retail spending "continues to show remarkable resilience," especially after the expiration of the payroll tax holiday earlier this year.

3. Earnings continue to roll in: Companies will continue to open their books this week, with Macy's, Wal-Mart and J.C. Penney, as well as networking firm Cisco Systems on deck.

Shares of Tesla Motor extended last week's rally. The electric car maker reported its first quarterly profit last week, and a separate report said Tesla sales outperformed German luxury brands.

With earnings winding down, S&P Capital IQ said, of the 453 S&P 500 companies that have reported first quarter results, 301 have beat analysts' estimates, 115 have missed, and 37 have met.

4. Disappointing data from China: Asian markets ended mixed after a report showed China's industrial production expanded in April, but failed to meet expectations. The Shanghai Composite declined 0.2% and the Hang Seng dropped 1.5%.

But the weakening yen pushed the Nikkei up 1.2%. Tokyo's benchmark index has rallied by 42% since the start of the year based on optimism about the country's aggressive monetary policy.

5. Muddy Waters reportedly shorting Standard Chartered: Standard Chartered fell into the spotlight after famed short-seller Carson Block of Muddy Waters Research was reported to have announced he is betting against the bank, saying its assets were deteriorating.

European markets finished the day mixed, losing momentum after a strong performance last week.

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