It has been a struggle so far this week for the S&P 500 information technology sector, which is down 2.3%. Not surprisingly, it has been a struggle as well for the Nasdaq Composite (-1.9%) and Nasdaq 100 (-2.3%), which are heavily-laden with information technology components. The S&P 500 itself, however, has fared better thanks to the relative strength of the S&P 500 financial sector, which is up 1.1%.
The inclination to take some profits has been helped by the backup in rates, which has caused some consternation over rich valuations in the information technology sector even though rates themselves continue to be low. The profit-taking cue this week, though, hasn't been the level of rates so much as it has been the pace at which they have risen.
The yield on the 10-year note climbed ten basis points to 2.24% between Monday's close and today. It would be remiss not to point out that the yield on the 10-yr note stood at 2.48% when the year began, which is why anyone making a fuss over the absolute level of rates is fussing up the wrong tree.
However, the knee-jerk sell-off in the wake of ECB President Draghi's remark yesterday that the threat of deflation is gone in the eurozone has underscored for many participants how quickly rates could rise if inflation does rear its head and central bankers angle to remove policy accommodation sooner than expected.
To this important point, the ECB said a short time ago that the markets "misjudged" Mr. Draghi's speech and that his remarks did not really signal a hawkish turn.
That qualification led to a notable uptick in the futures market that saw the Nasdaq 100 futures pivot from a six-point decline to a 13-point gain. Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT) and Facebook (FB), which were all trading modestly lower in pre-market action before the qualification, are all now showing modest gains in pre-market action.
In turn, sovereign bond markets turned around and reclaimed this morning's losses. The yield on the 10-yr note now sits at 2.22%.
The higher market rates and the steepening of the yield curve this week have bolstered the financial sector, which has also traded on the expectation that most, if not all, of the 34 financial companies required to take the stress test will see their capital return plans approved by the Federal Reserve. Those announcements will be made after today's close.
Notwithstanding the relative strength of the financial sector, the selling pressure in the information technology sector has won out as the main market driver this week. The semiconductor stocks in particular have been hard hit, evidenced by the 3.7% decline in the Philadelphia Semiconductor Index.
The health care sector has been another key laggard, shedding 1.1% on the back of a retreat in the biotech stocks, which have been white hot of late. The iShares Nasdaq Biotechnology Index (IBB) soared 12.2% from May 31 to June 23, but this week it has dropped 3.1% in a profit-taking move.
The decision by Senate leadership yesterday to delay the vote on the Better Care Reconciliation Act until after the July 4 recess was construed as a negative for the broader market since it was construed as more of a signal that it is going to be difficult to achieve reconciliation on a tax reform plan that lives up to the market's high expectations.
In other developments, General Mills (GIS), which reported better than expected fiscal Q4 earnings, tempered investors' expectations for its fiscal 2018 performance. That hasn't deterred its stock, which is up 1.4% in pre-market trading. KB Home (KBH) is also trading higher before the bell after topping fiscal Q2 estimates and raising its 2017 full-year financial targets.
Oil prices ($44.06, -$0.18, -0.4%), meanwhile, are trading lower following the weekly inventory report from the American Petroleum Institute, which showed a surprising 0.851 million barrel build in crude stockpiles, as well as a 1.35 million barrel build in gasoline stockpiles. The Department of Energy will release its weekly inventory report at 10:30 a.m. ET, shortly after the release of the Pending Home Sales Index for May (Briefing.com consensus +0.5%; prior -1.3%) at 10:00 a.m. ET.
The S&P futures are up six point and are trading 0.5% above fair value. The Nasdaq 100 futures are up 13 points and are trading 0.2% above fair value.
The cash market, then, should start the day on a higher note courtesy of a communicative nudge from the ECB. It will be key for the information technology sector to reclaim an upside leadership position. If it rolls over again, however, it could be another tough day of summer sledding for the broader market.