The old saying, “Loose lips sink ships” is prescient when it comes to the financial sector. The Fed’s ill-advised statements about tightening its monetary policy this spring led to a major spike in Treasury yields, which has all but torpedoed the bubble in income-oriented investments. The yield spike has also begun to put cracks in the real estate recovery, as witnessed by the 13.4% plunge in new home sales for July reported a few days ago. Higher mortgage rates are beginning to bite into potential homeowners’ pocketbooks.
The spike in Treasury yields has had the biggest impact on interest sensitive areas of the financial market and the economy as we have seen recently. As reported by Briefing.com, the weekly MBA Mortgage Index remained in a downtrend with Wednesday’s 2.5% fall marking the fourteenth decline out of the past sixteen readings including last week’s 4.6% slide.
In yet another sign that rising interest rates are taking a toll on the real estate sector, pending home sales on Wednesday were reported to have fallen 1.3% in July, worse than the 0.2% increase forecast by consensus and below last month’s decrease of 0.4%.
Earlier this week it was the Administration’s warnings to Syria about the potential for a military action that led to an increase in stock market volatility. The Dow Jones Industrial Average dropped shed 170 points on Tuesday while the Volatility Index (VIX) spiked over 10% in reflection of the increased level of fear and uncertainty on Wall Street. Granted the VIX is nowhere near as high as it has reached in previous market sell-offs, but the latest spike indicates that a healthy level of fear is returning to the market place.
What all of this illustrates is that the market is currently sensitive to loose talk by officials. Such a climate is typical of an environment where the cycles are in the peak phase, as we’ve seen in recent weeks (with three consecutive short-term cycle peaks in August). In other words, an internally weak market is extremely vulnerable to negative headlines. This isn’t the case when the market is internally strong, as evidenced by the new 52-week highs and lows. [Excerpted from the Aug. 28 issue of Momentum Strategies Report]