June 10, 2016, 4:00pm EST

On Wednesday we talked about the most important market in the world, right now.  It’s German bunds.

The yield on the 10-year German bund had traded to new record lows, getting just basis points away from the zero line, and thus from crossing into negative yield territory for the 10-year German government bond.  That has inched even closer over the past two days, touching as low as 1 basis point today.

Not surprisingly, stocks sold off today.  Volatility rose.  Commodities backed off.  And the broader mood about global economic stability heads into the weekend on the back foot.  For perspective, though, U.S. stocks ran to new 2016 highs this week, and are sniffing very close to record highs again.  Oil and commodities have been strong, and the broad outlook for the economy and markets look good (absent an economic shock).

What’s happening?  Of course, the vote that is coming later this month in the UK, on whether or not UK citizens will vote to ‘Stay’ in the European Union or ‘Leave’ continues to bubble up speculation on the outcome.  That creates uncertainty.  But the real reason rates are sliding is that the European Central Bank is in buying, not just government bonds, but now corporate bonds too.  The QE tool box has been expanded.  That naturally drives bond prices higher and yields lower.  But the question is, will it translate into a bullish economic impact (i.e. the money the ECB is pumping into the economy resulting in investing, spending, hiring, borrowing). As we discussed on Wednesday, it’s the anticipation of that result that sent rates higher in the U.S. when the Fed was in, outright buying assets, in its three rounds of QE.

With that, the most important marker in the world for financial markets (and economies) in the coming days, remains, the zero line on the German 10-year government bond yield.  Draghi has already told us, outright, that they will not take benchmark rates negative (as Japan did).  That makes this zero line a huge psychological marker for perceived value of the ECB’s QE efforts.

With this in mind, we head into a Fed meeting next week.  The Fed has done its job in managing down expectations of a hike next week.  With that, they have no risk in holding off until next month so that they can see the outcome of the stay/leave vote in the UK.  And, as we’ve discussed, the Bank of Japan follows the Fed on Wednesday night with a decision on monetary policy.  They are in the sweet spot to act, not only to reinvigorate the weak yen trend and strong stock trend in Japan, but to add further stimulus and perception of stability to the global economy.  We think we will see that happen.

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