Good afternoon, it is August 7th 2020 and here is your economic and market update from BlackBee.
- Graph of the Week: Negative Real Yields Driving Gold Rally
- Slight drop in jobless claims in the US
- Factory orders in Germany increase
Graph of the Week: Negative Real Yields Driving Gold Rally
Treasury yields have been driven down partly by Fed support, but also due to growing concerns about the condition of the US economy and the rate of new coronavirus cases, which threatens the pace of economic recovery. The real yield on the US 10-Year Treasury currently stands at -1.1%, the 5-Year stands at -1.35% and the 2-Year stands at -1.2%. Real yield is the return an investor gets after the inflation rate is stripped out from the yield on the bond. Historically low real rates have been an influencing factor behind the rally in gold and the weakness in the US dollar. Falling interest rates influence an appreciation in the price of gold as it makes the safe haven more attractive to investors. Investors are also looking for safe havens that won’t lose them money. At present, US treasuries stand to lose investors money when inflation is considered. Gold helps protect purchasing power and acts as a hedge. The spot price of gold has increased by 35% this year. Rising yields on government bonds typically indicate a bullish view on the dollar, however, with concerns growing over the condition of the economy and yields on US treasuries falling, the US dollar has been weak lately with the dollar spot index falling 9% since highs in March. Low yields have also had an impact on equity valuation. Bond yields are used to calculate the opportunity cost of investing in equities. If bond yields climb, the opportunity cost of equities rises, making them less attractive. Therefore, when yields fall, equities become more attractive. If inflation expectations fall we could see a reversal in some of these trends as real yields will begin to rise.
At a glance:
- The number of initial jobless claims in the US fell to 1.2 million last week in comparison to 1.4 million the week before. This breaks the rising jobless claims trend over the previous 2 weeks.
- BoE still expects the UK economy to rebound relatively quickly, though it states that it will be a slow process to return to employment and output levels that were seen pre-crisis. Monetary policy has been left unchanged.
- Factory orders in Germany jumped 27.9% in June. Although it is very positive news, orders remain well below their pre-crisis levels.
Best & Worst Performers of Large Cap US Stocks on Thursday
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Global Market Update
(as at close of markets 06/08/2020)