Last week started with risk markets around the globe continuing the plunge that began with the Brexit vote. However, as the markets received dovish commentary from central banks around the globe that they stood ready to combat any negative impacts from Brexit, risk markets rallied and ended the week higher. The Bank of England and European Central Bank seem poised to be proactive in advance of any weaker economic data with additional monetary stimulus.
Risk markets have traded sideways now for almost two years, but can additional monetary stimulus break us out to the upside? Since 2009, it has been the wrong trade to try and fight the Fed and global central banks. The impact of monetary policy has been to push risk asset valuations higher across the globe. Monetary stimulus is a powerful tool, but it does seem to be losing some of its impact. Or better said, the impact of any one unit of stimulus is having a smaller and smaller impact on asset prices.
I believe that the unintended consequences of negative interest rates are beginning to have an impact on global economics and, as a result, to asset pricing. In this environment, I will be paying close attention to Fed action at its July meeting. I expect the Fed to keep rates unchanged and cite global concerns with growth. I will be closely watching this Friday's release of the June employment report, as interest rates have traded significantly lower since the weak May report. Last week, 10-year Treasuries made all-time yield lows and ended the week at 1.44%.
Keep an eye on China as the Yuan's value has recently broken out to the downside. I think volatility will continue to be heightened in this environment in particular in the currency markets.
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