Trader Talk

A bet on rising rates and financials isn't working, as White House and the Fed cloud the picture

Key Points
  • Rates were expected to rise as the global economy expands this year, but bond yields are falling and financials haven't stepped up to take leadership from technology stocks.
  • President Trump's steel and aluminum tariffs acted as a catalyst for the market reversal, and many wonder how much to discount the threat of a trade war.
  • The Fed did not change its 2018 forecast, but it made more aggressive growth and employment forecasts as well as raising estimates for the number of hikes in 2019 and 2020.
Commuters exit a train at a Wall Street subway station near the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images

What gives? This was supposed to be the year of rising rates. The global economy is expanding, and some wage growth was seen as pushing the Fed toward its 2 percent target. Financial stocks were finally supposed to take the leadership away from technology.

Well, that trade is not working.

At first it seemed like it was. Going into February, the 10-year bond yield went from 2.4 percent to nearly 2.9 percent, topping at 2.95 percent on Feb. 22.

But since then, the trade has reversed. The latest down leg in the occurred shortly after 10 a.m. Thursday, when the 10-year yield resumed its leg down, touching 2.81 percent. Financials led the decline in stocks, with many regional banks such as KeyCorp and Zions dropping more than 1 percent in 45 minutes. Citigroup dropped 1.2 percent.

The combination of an existential crisis in social media stocks, mainly Facebook, with further confusion over how to discount the possibility of future trade wars and conflicting interpretations of the Fed's latest move is weighing on the market.

1) Where's the leadership? First and foremost, the stock market has lost its key leadership group, technology, and there is nothing taking its place. The subsectors that powered that sector forward last year, semiconductors and FAANG stocks, have stopped advancing and in many cases have reversed, led by Facebook:

Tech stock declines

(from 52-week highs)

Facebook: 15 percent

Alphabet: 10 percent

Apple: 7.6 percent

Netflix: 6.6 percent

Microsoft: 6.5 percent

Amazon: 3.6 percent

Semiconductors (SMH): 5.0 percent

Source: CNBC

The FAANG/semiconductor trade was among the most crowded of trades by momentum traders; once those stocks stopped going up in the second week of March (Facebook had topped in early February), the market stalled out.

No other sector has stepped up to move the market forward. Industrial and material stocks are suffering from trade war concerns. Banks, as noted, can't advance on the weak Treasury yields.

2) How to discount trade wars? The second week of March was when President Donald Trump announced steel and aluminum tariffs. And that's when the markets began reversing. European stocks gapped down at the open overnight as the markets braced for an announcement on China tariffs from Trump on Thursday.

Many European stocks closed at the lows, with the UK's FTSE 250 down 1.6 percent, Italy down 2.6 percent and Germany down 2.2 percent.

In a sign the market really does care about trade wars, the S&P immediately came off its lows at 12:15 p.m. ET and rallied 15 points in 20 minutes when details on the Trump China tariffs were announced. Specifically, there would, indeed, be a 30-day public comment period, which would allow corporations to have input and possibly dilute the impact of the tariffs.

3) How to read the Fed? The Fed did not change its 2018 forecast, but it did make more aggressive growth and employment forecasts, and it did raise estimates for the number of hikes in 2019 and 2020.

The White House is also in turmoil. Late morning Thursday came word that John Dowd, Trump's lead lawyer in the Russian probe, had resigned. The S&P 500 dropped another 8 points shortly after that.

Shortly after 1 p.m. ET, on Thursday the Dow was down more than 400 points.

"The implication is that he doesn't want Trump to testify, and Trump seems to indicate he might be willing to testify," UBS' Art Cashin told CNBC, which may open the president to legal jeopardy, Cashin noted.