The S&P 500 financial sector has been a stud this week and everything seems to be in place for it to continue to be a stud. The yield curve is steepening (again) and the Federal Reserve approved the capital return plans for all 34 companies that passed the stress test. Those plans included larger than expected dividend increases and/or share buyback programs in many instances.
JPMorgan Chase (JPM) and Citigroup (C) led the buyback charge. Both stocks are trading roughly 3.0% higher in pre-market action, as is Bank of America (BAC), so there is every reason to think the financial sector is going to be showing not just relative strength, but actual strength at the open.
That strength is providing some foundational support for the S&P futures at the moment. They are up unchanged and are trading in-line with fair value.
The early enthusiasm has been tempered, however, by another jump in long-term rates that is being attributed to angst that central banks other than the Federal Reserve are going to start dialing back their accommodative monetary policies.
10-yr yields in the eurozone are up six to eight basis points this morning for leading sovereign instruments like the German bund (0.44%), which has also reacted to a stronger than expected June CPI print for Germany. The 10-yr note yield for its part is up six basis points to 2.29% after starting the week at 2.14%.
This quick move up in rates can also be pinned on the effect of crowded long trades being unwound. It is the opposite of crowded short trades being unwound in the oil market, which has helped drive crude futures up 6.2% over the last week, including today's 0.9% gain to $45.14 per barrel.
The move in oil prices has also been helped by a weakening dollar, which has been weighed down by the relative strength of the euro and the British pound as traders are embracing the prospect of a shift in monetary policy at the ECB and Bank of England.
There was a slight upward shift in the first quarter GDP growth estimate in the U.S. The third estimate for first quarter GDP growth showed an upward revision to 1.4% from 1.2% (Briefing.com consensus +1.2%), with personal consumption expenditures and exports increasing more than previously estimated. The GDP Price Deflator was revised down to 1.9% from 2.2% (Briefing.com consensus 2.2%).
Real final sales, which exclude the change in inventories, were revised up to 2.6% from 2.2% in the second estimate.
First quarter GDP growth, therefore, was slightly better than expected, but as the report from the BEA itself says, "...the general picture of economic growth remains the same," which is to say it remains below potential.
Similarly, nothing shifted in terms of the underlying trend for initial jobless claims. They increased by 2,000 to 244,000 (Briefing.com consensus 241,000) for the week ending June 24, holding below 300,000 for the 121st consecutive week. Continuing claims for the week ending June 17 increased by 6,000 to 1.948 million.
This data hasn't moved the market, which is being distracted by the likelihood of a lower start for the technology sector. That expectation is rooted in the Nasdaq 100 futures, which are down 40 points and are trading 0.6% below fair value.
Presumably, the jump in rates is fueling some profit-taking inclinations among the richly-valued technology stocks, yet it also stands to reason that some sector rotation into the financial sector is also coming into play at the end of the second quarter.
What remains to be seen is if the financial sector can push the broader market up today or whether the weakness in the technology sector ultimately succeeds in pulling the broader market down.
In other corporate news of note, Walgreens Boots Alliance (WBA) has pulled the plug on its originally proposed deal to acquire Rite Aid (RAD) due to the belief that it wouldn't have received FTC clearance to complete the merger. Instead, Walgreens Boots Alliance plans to buy 2,186 Rite Aid stores, related distribution assets and inventory from Rite Aid for $5.175 billion in cash.
This latest development has also dealt a blow to the stock of Fred's (FRED), as that company was set to acquire additional Rite Aid stores in a separate transaction designed to accelerate its growth prospects.
Separately, Staples (SPLS) announced that it will be acquired by Sycamore Partners for approximately $6.9 billion or $10.25 per share in cash.
These dealings have commanded some added attention today, yet it is the disposition of the Treasury market and the financial and technology sectors that is holding sway over investor sentiment.