Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

DOW – 237 = 20,668
SPX – 29 = 2344
NAS – 107 = 5793
RUT – 37 = 1346
10 Y – .04 = 2.44%
OIL – .72 = 47.50
GOLD + 10.30 = 1245.20

The Treasury yield curve reached its narrowest level since the end of February, a possible indicator that investors are losing faith in the “reflation trade.” Yields started falling last week after the Federal Reserve raised interest rates for the second time in three months.

Typically, such a move would help push rates higher across the curve to better align with the higher baseline rates. However, the Fed’s reluctance to commit to a faster pace of interest-rate hikes, resulting in a short squeeze, which then lured bond bulls back into the debt market.

Long-term rates continued lower over the past two days as congressional Republicans have struggled to secure the support necessary for President Trump’s proposed health-care overhaul bill to make it out of the House of Representatives. A vote on the bill has been set for Thursday. Trump has said that passage of the bill is a prerequisite for tax reform.

These two events have brought into question the underlying assumptions that helped send Treasury yields rocketing higher in the aftermath of Trump’s Nov. 8 electoral victory. The Federal Reserve said they were sticking to guidance for 3 rate hikes, and not including speculation about potential pro-growth fiscal policies, including tax reform and infrastructure spending, throwing shade on Trump’s yet un-released details about his plans for the fiscal overhaul.

The American Health Care Act is not finding public support; per Five-Thirty-Eight the most recent six polls from firms such as Fox News, Morning Consult, and YouGov/CBS News showed that an average of 30% of Americans support the American Health Care Act, while 47% of people surveyed were against it. And health-care reform is undergoing last minute revisions prior to a vote.

Trump went to Capitol Hill this morning to muster support for the bill, but even if it passes the House, it might not clear the Senate. The bill might pass, or not – time will tell, but for today at least, the markets felt uncertainty. No coffee for the closer.

The stock market sold off sharply with many market leaders of the reflation trade lagging. And this is in context of a market that has priced in tax reform, infrastructure spending, and maybe a bit more.

And it follows on the heels of FBI Director Comey’s testimony before a rare open congressional committee hearing. The market ignored the slam at Trump’s credibility, and while the president himself may be Teflon, the market is not when it comes to his policy initiatives.

Earlier today, Bank of America Merrill Lynch released its monthly fund managers’ survey, with a record number saying the market is extremely overvalued, and just 10 percent expecting to see US tax reform passed by Congress before its August recess, as promised by the administration.

Again, a record number of institutional investors say the US equity market is overvalued. Yet at the same time, a net 48% of these managers say they are overweight stocks in their portfolios, meaning they hold more than their benchmarks would require.

If the health care bill passes the House and Senate, and if we see solid details on tax reform, we might still see a rally, but today was a day of uncertainty.

The Dow and the S&P snapped a months’ long streak without a drop of 1% for either index. As investors sold stocks, they snapped up bonds.

The yield on the 10-year Treasury note fell 4.6 basis points to 2.426% on Tuesday, while the yield on the two-year note shed 3.6 basis points to 1.260%, leaving the spread between the two at 1.166 percentage points, the narrowest level since Feb. 28.

The general direction of the yield curve in a given interest-rate environment is typically measured by comparing the yields on the two- and 10-year issues, although the difference between the federal funds rate and the 10-year note are often used as well.

The underlying concept is straightforward. When the difference between yields on short-term bonds and yields on long-term bonds decreases, the yield curve flattens, that is, it appears less steep. A flat yield curve is typically an indication investors and traders are worried about the macroeconomic outlook.

The big losers today were bank stocks, with the XLF ETF that tracks the sector dropping as much as 2.6%. Individual losers in the banking sector were Goldman Sachs, down almost 3%, Bank of America down over 5.5%, and Morgan Stanley, down 4%.

The US current-account deficit, a measure of the nation’s debt to other countries, fell 3.1% to $112.4 billion in the final quarter of 2016, the government said. The drop in the current-account deficit in the fourth quarter was tied to a large increase in primary income — returns on American-owned assets held abroad. That offset a larger trade deficit in goods.

There are a raft of Federal Reserve officials speaking this week. This morning, Fed Bank of New York President William Dudley gave a talk at a forum on banking standards in London, in which he was critical of Wells Fargo but made no mention of monetary policy. Dudley is calling for better incentives to drive performance on Wall Street, while stating banks have “a long way to go” in reforming internal culture.

Google has issued a public apology to major advertisers after their spots were featured alongside YouTube videos carrying homophobic and anti-Semitic messages. It led to Marks & Spencer (MAKSF), HSBC, the BBC, and McDonald’s (MCD) pulling ad content from Google (GOOGL) sites in the UK.

The tech giant is taking a “tougher stance on hateful content” in response, as well as hiring more staff and tightening safeguards in its YouTube Partner Program.

Wal-Mart (WMT) will launch its first investment arm to expand its e-commerce business in partnership with retail start-ups, venture capitalists and entrepreneurs. Called Store No. 8, the Silicon Valley-based investment team will work with startups that specialize in areas like robotics, virtual and augmented reality, machine learning and artificial intelligence.

Augmented reality is coming to Apple, and the first fruits could be “Matrix-style” 3D photographs that users can move around – and eventually view through AR smartglasses. Meanwhile, Apple unveiled an updated version of its iPad tablet with a brighter screen and a $329 starting price that is the lowest ever for a full-sized tablet from Apple.

Just don’t take it on a plane. The US issued new rules that will prevent passengers from carrying most electronic devices into the cabin during flights from eight countries in the Middle East and Africa. Passengers will have to check in any devices bigger than a smartphone — including iPads, Kindles and laptops — before clearing security or boarding.

Saudi Arabia may extend production cuts if oil supplies stay above the five-year average. New data shows the US rig count growing for a ninth week. US crude output has climbed to 9.1 million barrels a day, the most since February last year. And a Libya official said two major ports are preparing to restart oil exports.

British inflation last month shot past the Bank of England’s 2% target for the first time since the end of 2013, leaping by 2.3% in annual terms. The British government announced yesterday that Prime Minister Theresa May would trigger Article 50 of the Lisbon Treaty on March 29 and initiate the two-year negotiation process for leaving the European Union.

Goldman Sachs (GS) will begin moving hundreds of people out of London before any Brexit deal is struck as part of its contingency plans for Britain leaving the European Union. Leading financial firms warned before last year’s June referendum that they would have to move some jobs if there was a leave vote, and have been working on plans for how they would do so for the past several months.

Many banks now believe they will lose “passporting” rights, that let them sell services across the EU from their London hubs. The bulk of Goldman’s European operations are in Britain, where it has around 6,000 employees.

Britain’s high street banks processed nearly $740 million from a money-laundering operation run by Russian criminals with links to the Kremlin and the FSB, per The Guardian. HSBC, RBS, Lloyds and Barclays are among 17 banks based in the UK that are facing questions over what they knew about the international scheme and why they didn’t turn away suspicious money transfers.

Marriott International (MAR) plans to add up to 300,000 rooms worldwide by 2019, as part of a three-year growth plan, ahead of the No. 1 hotel chain’s investor day. The owner of Ritz-Carlton and St. Regis luxury hotel brands said it would earn $675 million in stabilized fees from hotel rooms added to its system. Earlier this month, Marriott said it would speed up expansion of its Starwood brand in Europe by 2020.

Target’s first fully redesigned shop in Houston will include two separate entrances: one for time-crunched grocery shoppers, and another for those who want to browse fashion or beauty. The company will use the design, which also includes order pickup parking spots, as a starting point for the 500 stores it plans to make over in 2018 and 2019. It’s part of the $7 billion investment Target (TGT) disclosed last month.

Sears (SHLD) revealed “substantial doubt” about its ability to stay in business in an annual report filed late Tuesday. The company said in the report, “Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern.”

Sears said its efforts to generate cash by selling or licensing brands like Kenmore and Diehard, as well as selling valuable real estate, should mitigate that doubt and satisfy its estimated cash needs for the next 12 months. But the company said it can’t make any guarantees.