Nearly the entire Brexit decline has been taken back except for moves in the British pound and European bank shares.
Bonds staged a massive rally globally. Switzerland hit a New Financial Milestone: Negative Yield on 50-Year Bonds and the Entire Swiss Yield Curve.
Everyone a Winner
Bloomberg went so far as to claim Everyone’s a Winner in Brexit Aftermath as Doves Rescue Market.
One week after Brexit, the lesson investors are taking away is that there’s no problem central banks can’t fix.
Just days after the U.K.’s vote to leave the European Union roiled financial markets around the world, stocks and bonds surged in tandem this week as policy makers once again rode to the rescue, dropping hints of further stimulus and suggesting they’ll keep interest rates lower for longer.
With almost $12 trillion of government bonds globally paying less than zero, a rush into Treasuries Friday pushed yields to record lows, even as encouraging economic data helped propel U.S. stocks toward all-time highs.
“This may be the new normal,” said Aaron Kohli, a fixed-income strategist in New York at BMO Capital Markets, one of 23 primary dealers that trade with Fed. “If you flood the markets with liquidity, and you have the anticipation that the central banks are going to be dovish — either adding to quantitative easing or becoming less hawkish, as the case may be for the U.S. Fed — any assets that aren’t impaired or encumbered are going to do very well.”
The S&P 500 Index has rallied 5.2 percent in four days, all but erasing the post-Brexit swoon. The index recorded its best week since November after capping a third quarterly advance.
Some of the snapback in stocks came as investors unwound bearish bets put on ahead of the referendum and during its immediate aftermath. A Goldman Sachs Group Inc. index of the most shorted stocks in the Russell 3000 Index rose on Wednesday by the most in more than six years.
Even as equities rally, few signs point to a reversal for Treasury yields. Since the Brexit vote, strategists have slashed their U.S. yield forecasts for this year and next, and futures traders virtually erased bets on a Fed rate hike in 2016. A lower-for-longer scenario encourages investors to buy Treasuries that mature in decades.
The tally of negative-yielding sovereign debt worldwide means investors are effectively paying to own government bonds. Japanese benchmark yields extended their push below zero this week as some economists predicted the central bank will add to its record stimulus program. Benchmark German yields fell below zero last month, while yields have turned negative for Swiss debt for all maturities out to 50 years.
How much longer this can go on is anyone’s guess but stocks are likely to decline for years when the party does end.
Meanwhile, I have a fitting musical tribute.
Jim Dandy to the Rescue
Mike “Mish” Shedlock