The S&P 500 was dragged down by the interest rate sensitive sectors, including utilities, consumer staples and telecommunication services, as the yield of the U.S. 10-year Treasury Note surged 13.47% for the week to close at 2.409% on Friday. Hedge funds were dumping the longer-term Treasuries in anticipation of the Fed’s first rate hike before the end of the year. 

As of June 2, there are 674,156 short positions of 10-year U.S. Treasury Notes, traded on the Chicago Board of Trade (CBOE:TNX), by leveraged funds. This is compared to about 384,089 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. The TNX contracts are traded in units of $100,000 face value.

The global bond sell-off could have been triggered by the previous Friday’s release of the second estimate of the first-quarter U.S. GDP by the U.S. Department of Commerce, showing that U.S. GDP contracted 0.7% in the first-quarter this year, instead of the initial reading of a 0.2% gain. The number still beat Wall Street economists’ forecast of a 0.9% contraction. 

The yield of the U.S. 10-year Treasury note jumped 5.38% to an intra-day high of 2.388% on Wednesday, after the release of U.S. trade data and important comments from European Central Bank (ECB) President Mario Draghi at the ECB meeting in Frankfurt.

The U.S. Bureau of Economic Analysis, the Commerce Department, said on Wednesday that the U.S. April trade deficit dropped 19.2% to $40.9 billion after surging to $50.6 billion in March, the highest level since late 2008. Analysts had expected the U.S. trade deficit to narrow to $44.0 billion in April. In the report, April exports edged up 1% to $189.9 billion, led by a big rise in commercial airplane sales, while imports fell 3.3% to $230.8 billion. The latest trade data prompted Morgan Stanley to raise its second-quarter U.S. GDP forecast to 2.7% from 2.2%.

Mr. Draghi said at their ECB conference that the Eurosystem staff macroeconomic projections foresee annual Harmonised Indices of Consumer Prices (HICP) inflation at 0.3% in 2015, 1.5% in 2016 and 1.8% in 2017. In comparison with the last forecast in March, the inflation projections have been revised upwards for 2015 and remain unchanged for 2016 and 2017. HICP is the consumer price inflation measured in the eurozone.

The U.S. 10-year Treasury notes tumbled again on Friday, sending the yield up another 5.76% to an intra-day high of 2.442%, after the release of the May U.S. non-farm payroll report, which came in better than expectations. The U.S. Bureau of Labor Statistics said that the U.S. government and private businesses added 280,000 jobs in May to the U.S. economy, above the 3-month average of 207,000 jobs and the 12-month average of 257,000 jobs, according to our data. More decent numbers like this in the June report could definitely trigger the first rate hike in September. 

For the week, the U.S. dollar index inched 0.64% lower to close at 96.361 on Friday, while the 10-year U.S. Treasury yield surged 13.47% for the week to close at 2.409% on Friday. The S&P 500 closed at 2,092.83 on Friday, down 0.69% for the week. 

The best performing S&P 500 sector for the week was Financials, up 0.76%, as the profit margins for banks improve when the difference between short-term interest rates and long-term yields widens. The worst performing sectors for the week were Utilities and Consumer Staples, down 3.85% and 2.56%, respectively. The high dividend yielding utilities and consumer staples stocks that have been considered an attractive bond alternative for income investors, are becoming less attractive in a rising rate environment.

From our technical viewpoint, the S&P 500 is at the bottom of the ascending triangle pattern. Although the S&P 500 is moving in a narrow falling wedge pattern, it is not certain that the index can bounce from this level. The S&P 500’s next move could depend upon the yield of the U.S. 10-year Treasury note, which has been trading, of late, in an inverse correlation with the S&P 500. 

If the U.S. and the eurozone economy show more signs of sustainable recovery in the coming weeks, the 10-year Treasury yield could break out its trendline resistance at 2.41% and move higher to test the head technical resistances at 2.5% and 2.66%, or the 23.6% Fibonacci retracement level. In the event that the 10-year Treasury yield breaks out, the S&P 500 could pull back further. The near-term technical supports for the S&P 500 are 2,092 and 2,084, or the 100-day SMA, 2,080, 2,070 and 2,061.

S&P 500 Summary: +1.65% YTD as of 06/05/15
Barclay Hedge Fund Index: +4.64% YTD 

Outperforming Sectors: Healthcare +8.26% YTD, Consumer discretionary +5.79% YTD, Information technology +3.58% YTD and Materials +2.45% YTD.

Underperforming Sectors: Telecommunication services +0.56% YTD, Financials –0.07% YTD, Industrials –1.39% YTD, Consumer staples –2.46% YTD, Energy –3.53% YTD and Utilities –10.29% YTD.