Digesting Monday’s rally. Stocks opened slightly lower this morning after yesterday’s solid gains amid optimism surrounding vaccine development and progress toward reopening the economy. Federal Reserve Chairman Jerome Powell’s 60 Minutes interview also helped propel stocks to a strong start to the week by reaffirming the central bank’s commitment and ability to further aid in the economic recovery. Asian equities tracked Monday’s gains in the United States and closed solidly higher, though European markets traded lower midday along with the United States. Testimony by Powell and Treasury Secretary Steven Mnuchin before the Senate banking committee today will be watched by market participants for clues on potential additional stimulus measures.
Gold’s luster. Gold has rallied to near an eight-year high so far this year. The metal’s performance can be attributed to the current economic challenges along with government’s massive monetary and fiscal policy measures to support the recovery. We discussed the metal’s strength in our May 13 blog.
Treasury yields show signs of life. The 10-year Treasury yield perked up with Monday’s equity rally, reaching its highest level in more than a month, and its highest single-day increase in two months. Treasuries have not yet confirmed the strong equity rally off March 23 lows; the 10-year Treasury yield is still sitting lower than where it was when equities bottomed. Any meaningful economic recovery in the second half of the year is likely to push Treasury yields higher, but with minimal inflationary pressure and an economy not expected to return to full strength until 2021, we expect any pickup in yields to be manageable.
Fed says no to negative rates. A week of Fed members downplaying the need for negative interest rates culminated with Fed Chair Powell’s May 17 appearance on 60 Minutes. While Powell focused mainly on the economy, he did take some time to discuss his view that central banks’ experiment with negative rates has not been particularly successful. There’s currently over $11 trillion of negative-yielding debt in the global economy. While negative rates remains an option, the Fed has signaled it still has several more effective options on the table. We discuss recent Fed comments on negative rates later today on the LPL Research blog.
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