July 22, 2016, 3:00pm EST
Last Friday we talked about some key charts to keep an eye on this week, which included U.S. stocks, German stocks, Japanese stocks, U.S. yields and German yields.
Remember, in a world where stability is king, central bankers have been very sensitive to swings in key financial markets, with the idea that confidence and the perception of stability can become quickly become unhinged by market moves. When that happens, it becomes a big, viable threat to the global economic recovery and outlook.
So those markets we reviewed provide a good check on the market vitals at this stage. And the big disconnect between yields and stocks has been a growing concern.
On that stocks front, we had further gains this week. U.S. stocks printed new record highs again for the week. And German and Japanese stocks, finished higher for the week as well, and remain on the cusp of a big bullish breakout of the trend that describes the correction of the past year for Japanese stocks, and German stocks.
But yields have been lifeless. In the most important bond market in the world right now, the German 10-year yield remains straddling the zero line (a huge level for both fundamental and psychological reasons). And the U.S. 10-year yield has been essentially been anchored by the German bund yield.
When optimism improves, in this environment, stocks go higher and yields go higher, as global capital pulls out of the safety of government bonds in favor of higher return assets (stocks). But it’s not happening, much, at the moment. Though we should acknowledge that both the German and U.S. yields are 20 basis points higher than worst levels of just earlier this month. Still, U.S. stocks are at record highs, and most major stock markets have fully recovered the post Brexit vote declines.
So yields are an important spot to watch next week. The Bank of Japan should announce for more stimulus next week – perhaps a third round of the Abe-led QE campaign, and perhaps in coordination with fiscal stimulus that has been telegraphed by the Abe administration.
As we’ve discussed, contrary to the popular view, QE ultimately has pushed yields up, not down. Because people become more optimistic about the economic outlook.
On a final note, another key market over the past seven months has been oil. We’ve talked a lot about the importance of oil to global economic stability. At $26 oil was threatening another global financial crisis. It’s, of course, doubled since and stocks have tracked the recovery.
Source: Billionaire’s Portfolio, Reuters
But the past two weeks, oil has been moving lower as stocks have been printing new record highs. Oil closes the week still hanging around $45, but this will grow in importance, and send negative signals, if it were to continue lower from here next week — something to keep an eye on.
Have a great weekend!
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