Skip to content
- 10 Year T-Note yields skyrocketed today by nearly 5%, as investors realized the statistical aberration of falling yields and rising stock market prices. Those who were risk averse due to the fallout from Brexit have seen the rising prices in US markets and finally moved their money into the stock market and out of the bond market over the weekend, causing a lower demand for bonds, lower bond prices, and higher yields.
- The Dow was moderately up by 0.44% as confidence is restored in Britain. Previous uncertainty about British leadership has cleared over the weekend, according to the WSJ, causing the British FTSE 250 to rise by a whopping 3.4% today. The positive correlation between British and US stocks led to a smaller positive move domestically.
- As Brexit’s impact on the market subsides, the stock market will be most affected by domestic news, including bank earnings and other corporate profit reports for the second quarter. Today, the S&P 500 set another record high of 2136.92. Volatility as measured by the VIX is at a low level of 13.54, suggesting that the stock market trends described above have been caused by a reduction in fears, and less by positive news, meaning that there is still upside potential domestically based on earnings.
- 10-Year T-Note yields fell to a record low of 1.366% today, indicating an extreme demand for risk free assets. However, American stocks rose as well, with the Nasdaq Composite up 1.64%, its strongest performance in more than a week. One likely causative factor for this break in correlation is a global trend towards investment in American securities, be it stocks or risk free bonds.
- Global uncertainties, especially with Brexit, and strong domestic American manufacturing and service sector activity caused a movement towards safer countries, especially the United States. Japan became a less attractive haven today as Japanese service sector sentiment weakened by 1.8 points to 41.2 for June, the worst reading since October 2014 according to Reuters.
- The movement towards American securities today concentrated on basic materials (XLB) and industrials (XLI), with those sectors up 2.4% and 1.96% respectively. The outstanding performance of these sectors suggests that domestic manufacturing is strong and foreign investors want to take advantage of reliable dividends.
- The Dow continues to fall, although it recovered in a “V” shape towards the end of the day for a total loss of 0.13%. The Nasdaq, however, was up almost 0.4%. This was caused by energy stocks (represented by XLE) falling by 1.02% due to a 4.8% drop in crude oil prices to $45.14. Crude oil and energy stocks, which are a larger component in the Dow than the Nasdaq, are directly correlated.
- Other than energy, investors returned to a “risk-on” mode by selling stocks that they had moved into as safe havens because of Brexit, according to the Wall Street Journal. Utilities (XLU), one of these havens, fell 1.85% today.
- 10-Year T-Note yields rose moderately by 0.14%, corresponding to a decrease in prices caused by a decrease in demand. This decrease in demand was also due to a move away from conservative assets, as concerns over Brexit are having less of an effect and investors return to worrying about domestic news.
- Some British funds, like Henderson Global and Canada Life, have stopped investors from withdrawing their money. This is one possible factor that could have prevented the markets in Europe, which are correlated with the US for the past few weeks, from continuing their slide. The Dow and Nasdaq were slightly up, 0.44% and 0.75% respectively.
- Because 10 Year T-Note yields have fallen quite precipitously due to an influx of money from a flight to safety, yields increased today by 1.32% caused by a decreased demand. However, Japanese bonds have been seeing increased demand, leading to a yield drop into negative territory for even their 20 Year bond, which stands at -0.005%. This move has been caused by investors who believe the yen is the safest currency, according to the WSJ, leading to a flight to yen-denominated securities. This has also negatively influenced T-Note prices (and positively affected yields).
- Risky sectors like biotechnology, though still domestic, caused the stock markets to rally today. Biotech was up by 2.3% (Nasdaq Biotech Index), while health care also gained 1.2%. According to the WSJ, this in turn was caused by renewed confidence in the US economy due to positive service sector activity for June.
- With 10 Year T-Note yields continuing their slide, down 5.46% just today, the yield curve has begun to flatten. This fall in bond yields (increase in prices), especially in the long run, has caused banks to be able to make less of a profit by taking advantage of the yield differential between short and long run. According to the WSJ, these increases in bond prices will lead to large decreases in profits and stock prices for the financial sector.
- Stock prices continue to fall, reversing their rally last week with the Dow and Nasdaq down 0.61% and 0.82% respectively due to an increase in investors’ risk aversion. This conclusion is also supported by the fact that bond prices have increased, indicating a demand for safer bonds versus stocks.
- This uncertainty in the market has been caused by continued fallout from Brexit, as JP Morgan fell 2.79% today and stocks linked to risky assets like commodities have fallen (SPDR Energy XLE is down 2%). The general shift away from riskier sectors shows that investors are being more risk averse in their security selection and the move to bonds shows that investors are being risk averse in their asset allocation as well.
- The 10 Year T-Note yield hit a record low of 1.385% today, then recovered to a yield of 1.446%. This drop in yields is caused by a demand for bonds, and the factor causing this demand is a combination of the flight to safety from volatile stock markets and negative yields in countries like Germany and Japan.
- Emerging markets may be driving markets higher, according to the Wall Street Journal. These markets were adversely affected by Brexit for no apparent reason other than simple correlation with the general market, and are recovering at a faster pace: A popular emerging market ETF, ticker EEM, is down only 0.20% since Thursday’s close, while the Nasdaq Composite (of a more accurate comparative risk level than the Dow) is still down close to a percent on the same period.
- American consumer discretionary shares rose the most this past week (SPDR Discretionary XLY is up 1.10% today), suggesting that the market’s rise was caused not by a fundamental rectification of the questions Brexit poses, but a return to normal levels in stocks that should be unaffected by Brexit. This conclusion is further adduced by the fact that Treasury yields remain at near-record lows, indicating that Brexit still poses lurking risks that may resurface next week.
- Markets rallied again today, with the Dow and Nasdaq both up 1.33%, almost fully reversing the losses resulting from Brexit, with an only 0.34% drop in the Dow since Thursday’s close. This volatility is partially caused by the combination of a sanguine domestic outlook with international turmoil — according to the Wall Street Journal, GDP models forecast 2.7% growth in the second quarter, versus 1.1% the previous quarter this year.
- U.S. utility stocks have acted as a safe-haven for investors, with the sector rallying the day of Brexit; the SPDR Utilities (XLU) are up 4.27% since Thursday’s close. This flight to safety has caused the Dow, composed of blue-chip companies, to rise more than the Nasdaq Composite, showing that this a contributing factor to why the Dow is down 0.34% since Thursday’s close but the Nasdaq is down almost a full percent.
- T-Note yields are recovering, corresponding to a decrease in bond prices. This also demonstrates that investors are more confident and demanding stocks by showing that they are willing to forgo higher yields in the bond market in favor of stocks — there is usually a negative correlation with bond prices and the stock market and a positive correlation with bond yields and the stock market. This may be a sign that the market is set for a full recovery.
- Both the Dow and Nasdaq continued their rally today of more than 1.5% in the wake of Brexit, with many seeing the drop in stock prices as a buying opportunity according to the Wall Street Journal (ex. RedHat, which had dropped 11% but rebounded 4% due to its isolated nature from Europe, according to WSJ). Other factors contributing to this possibly short-lived rally include the covering of shorts by institutional investors, which increases demand for shares on the open market thereby increasing stock prices.
- Government bonds, including the 10 Year T-Note, have seen a 96% increase in prices according to the WSJ, which of course corresponds to a decrease in yields which have been flat since the massive drop following Brexit. US 10 Year T-Note yields have been further pushed down (6%) by the fact that many other alternative sovereign bonds yield negative interest rates (Germany, as of today, with -0.12%).
- U.S. manufacturing has stabilized, with the ISM increasing 7.5 points to 56.8, and U.S. Midwest factory activity rose for the first time in 10 months. Additionally, the Chicago Business Barometer is now at 49.4, almost breaking into expansion territory. This news was another contributing factor to the ongoing rally in stock prices this week.
- The Dow and Nasdaq rebounded today as a result of investors realizing they had overreacted to their precipitous fall the past few days. One contributing factor could be that investors know that the US economy remains strong, with first quarter GDP being revised higher than expected to 1.1% this morning.
- The Bank of England injected 3.1 billion pounds of money into the British financial system, easing liquidity fears and calming markets. European markets and the British pound reacted overwhelmingly positively, somewhat erasing the damage over the past two trading days. This optimism carried over into US markets, also contributing to the markets’ recovery from a correction based on external uncertainty.
- 10 T-Note yields remained flat after their massive drop, as institutions who purchased these bonds in the past few days remain reluctant to return to pursuing a “risk-on” strategy.
- The uncertainty over Brexit’s impacts carried through the weekend and is the most important factor causing a market correction because the market had already priced in a “stay” vote.
- The massive decrease in the value of the pound sterling (3%, large for a currency) to $1.31, a level not seen since 1985, and the ensuing fall in financial stocks in the US (as well as in the EU) pulled markets lower, mainly because banks were already positioned for a hike in interest rates which will now not materialize.
- The global uncertainty affected small capitalization stocks more negatively (the NASDAQ fell more than the Dow), although that effect was offset by the fact that international tensions do little to sway domestic share prices other than a general correlation. The Utilities SPDR ETF (XLU) reflects this as it was in fact up 0.87% today.