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Friday, July 1, 2016
Markets rise while US Treasury yields set record lows!!
Dow rose 42 as it approaches 18K again, advancers over decliners almost 3-1 & NAZ added 25. The MLP index was fractionally higher in the 318s & the REIT index went up 2+ to the 365s, a new record. Junk bond funds were a little higher & Treasuries soared, bringing the yield on the 10 year Treasury down to record lows (see below). Oil was a tad lower while gold gained to a 2 year high.
The 2 front-runners to succeed David Cameron as prime minister set
the UK on a collision course with EU leaders after both said
they were in no hurry to trigger the mechanism to start Britain's
withdrawal from the bloc. Michael Gove said that the legal
notification won't be made this year if he becomes prime minister,
echoing comments made by Theresa May. The demonstration of reluctance to
move quickly sets up a clash with the remaining heads of gov,
who said this week that the UK needs to move “as quickly as possible” to invoke the necessary article to start the 2-year Brexit process. “We control the timing of when we trigger Article 50, and we will do
it when we’re good and ready,” Gove, the justice secretary in Cameron's
gov, said as he set out his bid for
the leadership of the ruling Conservative Party. He added that his gov
would conduct “extensive preliminary talks” before invoking the article,
adding: “We need to make sure we have the best possible deal.” Launching
her leadership campaign yesterday, May, the favorite with bookmakers &
the candidate with the most support among Conservative lawmakers so
far, said the new gov would need to agree on a negotiation
strategy first, so “Article 50 should not be invoked before the end of
this year.” After meeting without Cameron in Brussels, EU leaders issued a statement saying “there is a need to
organize the withdrawal of the U.K. from the EU in an orderly fashion”
following last week’s referendum vote to quit the bloc. They insisted
that negotiations to finalize the secession won't be started until the
UK gives official notification of departure.
Yields on 10 & 30-year US Treasuries fell to record lows,
defying forecasters who for years have said they would rise, amid signs
that Britain's vote to leave the EU will curb global
economic growth & prevent the Federal Reserve from raising interest
rates this year. Just days before America's 240th birthday, the
US 30-year bond yield dropped as much as 10 basis points to an
unprecedented 2.19%, while benchmark 10-year yields slid to
1.38%. They joined a rally in bonds around the globe as some of
the world’s biggest investors said the Brexit vote means subdued
growth & lower yields for years to come.
The
decline in yields on Treasuries, the world"s largest bond market at
$13.4T, will affect everything from US mortgages & corporate
bonds to borrowing costs for cities & govs around the globe.
The rally extends a bull market for US debt that began in the early
1980s, after 10 & 30-year yields peaked above 15%.
Euro-area manufacturing grew faster than initially estimated in Jun, recording its best performance this year. A Purchasing Manufacturers' Index rose to 52.8 from 51.5, slightly
higher than the flash estimate of 52.6, Markit Economics said.
The results were collected prior to the result of Britain's EU referendum, which saw the country vote to leave the bloc. Eurostat
said in a separate report that unemployment in the 19-nation region
fell to 10.1% in May, the lowest in almost 5 years. “Any
Brexit impact is yet to be seen,” said Markit. “It seems likely that business and consumer
spending will be adversely affected across the euro area in the short
term at least.” The figures
highlight the challenge facing policy makers as they try to assess the
economic fallout from Britain's decision to quit the EU. ECB VCP Vitor Constancio said this week that while a
relatively small trade impact could be magnified by a hit to
confidence, the ECB still has the tools necessary to respond to any
adverse consequences. The only nation to show manufacturing in
contraction (a reading below 50) was France, which Markit said was
likely due to strikes which have disrupted business in recent months.
Greece enjoyed a “welcome return to growth,” Market said, with its
best reading in more than 2 years. Euro-area factory growth was led by Germany & Austria, & expansion also gathered pace in Spain, Ireland & Italy.
The stock market rally is mind-boggling. There is chaos & confusion in euro economy regarding the British exit from the EU, but nobody is worrying about it. At the same time, the principal safe haven investments, gold & Treasuries, are shooting up from negative bets on the future of the stock market. That disconnect has to be resolved & betting on higher stock prices does not seem to be in the cards.
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