U.S. equity markets surged to start the week, as solid retail sales helped to boost optimism in the markets early in Monday trading. However, stocks eventually slumped and finished the day close to breakeven, as the Dow managed to gain just 0.1% while the S&P 500 lost 0.1% and the Nasdaq fell by 0.2%. Commodity markets were also mixed as gold slumped by $10/oz. and oil finished the day lower by 0.4%. Softs and grains managed to rebound as corn pulled ahead by 3.8% and sugar jumped higher by 3.1%. The big news was in the Treasury markets where yields continued their ascent higher despite the implementation of QE2; 10 Year Yields surged by 0.14% up to 2.92% while seven and five year debt yields moved higher by 0.14% and 0.17%, respectively.
Today’s rocky session came at the hands of somewhat positive data showing that U.S. retail sales rose 1.2% in October thanks to solid automotive sales. Markets also received a boost from M&A activity in the industrial/agricultural sector when Caterpillar announced that it was buying mining equipment firm Bucyrus for $8.6 billion, which helped to lift the fortunes of the entire sector in mid-morning trading. But investors once again turned attention to the oft-criticized QE2 program and the growing chorus of investors and economists who believe that the bond buying campaign will only add to the deficit and decrease investor confidence in the U.S. Treasury’s ability to repay debts. In another piece of bad news for the Treasury market, the lead analyst at Moody’s said that a permanent extension of the Bush tax cuts would be a ‘definite negative’ for the U.S. credit ratings, further helping to scare investors away from the securities. “The article on the evaluation of U.S. ratings spooked the market a bit,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. “It was an impetus for the last leg of the down trade,” he said. “It’s not a ringing endorsement of the first couple of rounds of QE. There are a lot of worries out there.”
One of the biggest winners on the day was the PowerShares DB Agriculture Fund (DBA), which gained 1.3%. Today’s gains were a result of a rebound in many agricultural commodity prices, including corn and sugar, which had been beaten down last week but rebounded nicely in Monday trading. These commodities combine to make up roughly 25% of DBA’s total assets; the fund also gained thanks to strong days in the cocoa and coffee markets, both of which were up by more than 1.6% on the day. Monday’s uptick was on above average volume, which helped the fund to erase some of its heavy losses from last week and put it back on its winning path; the fund is now down just 2.8% over the past two weeks but has gained 23.1% over the past half year period [see more fundamentals of DBA here].
One of the biggest losers in the ETFdb 60 was the iShares S&P California Municipal Bond Fund (CMF), which sank by 3.2% on the day. In a rare appearance for the municipal bond fund in the daily roundup, CMF sank after worries over the Federal budget spread to one of the weakest state budgets, California. It didn’t help that the state launched a $14 billion debt sale on Monday which flooded the market with even more muni bonds despite lukewarm demand at best. “We’re seeing a huge supply of municipal debt coming to the market this week, almost twice as much as usual,” said Matt Fabian, managing director at Municipal Market Advisors. “The increased supply is adding pressure on the market.” This helped to push up yields across the municipal world and send prices sharply lower as the country’s most populous state attempts to plug a $25.4 billion budget hole before the Thanksgiving holiday and soothe individual investor fears over the debt crisis in the market [see holdings of CMF here].
Disclosure: No positions at time of writing.