FALLING FOREIGN BOND YIELDS ARE PULLING TREASURY YIELDS LOWER -- GLOBAL STOCK INDEXES HAVE A STRONG WEEK AND NEAR UPSIDE BREAKOUTS -- FALLING YIELDS AND A WEAKER DOLLAR PUSH GOLD TO SIX-YEAR HIGH -- GOLD MINERS ALSO HAD A BREAKOUT WEEK
NEGATIVE FOREIGN YIELDS LEAD TREASURY YIELDS LOWER...Bond yields are dropping all over the world. The British 10-Year yield fell this week to the lowest level since 2016 (0.80%). The Japanese yield remains in negative territory. Nearly a quarter of bond yields in global developed markets are already negative (below zero); that includes nearly a half of the eurozone. French and German yields are near their lowest levels on record. Most of the attention, however, is being given to the 10-Year yield on the German bund which is the benchmark for the eurozone. And has the most influence on Treasury yields.
Chart 1 compares the 10-Year German yield to the 10-Year Treasury yield. And it shows the U.S. yield following Germany lower. The gray area shows the German yield peaking early in 2018 and falling sharply since then. The green weekly bars show the 10-Year Treasury yield falling sharply this year. Its yield has fallen to 2.00% which is the lowest level since late 2016. The red area shows the German yield falling below zero into negative territory (-0.31%). The fact that foreign yields are so much lower than the U.S. increases demand for higher-yielding Treasuries which pushes their prices higher and yields lower. Lower foreign yields also reflect weaker foreign economies, which is weighing on the U.S. economy leading to lower Treasury yields. And a more dovish Fed.
This week's dovish turn by central bankers in the U.S. and Europe pushed global yields even lower. That of course is bullish for bond prices. And has pushed global stocks sharply higher. Falling U.S. rates have also weakened the dollar which has boosted the price of gold to the highest level in six years. The Japanese yen, which is highly correlated to gold, hit a 52-week closing high. A falling dollar has also given a boost to emerging markets, especially ones with commodity exposure. Chinese stocks also had a strong week.
GLOBAL STOCKS RALLY...The weekly bars in Chart 2 shows the MSCI All Country World iShares (ACWI) trading near the highest level since the start of 2018. A weekly close above its April high would be an impressive upside breakout. The ACWI includes the U.S. market which is still the strongest in the world. The S&P 500 hit a record high on Thursday, with the Dow and Nasdaq not far behind. Foreign stocks, however, also had a strong week and may be nearing an upside breakout of their own.
The weekly bars in Chart 3 shows the MSCI All CountryWorld index ex USA iShares (ACWX) having an even stronger week (+3.2%) and right up against its April high and a potential "neckline" extending back to last July. The ACWX includes foreign developed and emerging markets. EM markets, however, gained nearly twice as much as foreign developed markets (4.8% versus 2.5%). Asian markets led by China were a big reason for that. So were gains in commodity and oil producing countries like Brazil and Russia which benefited from a big jump in the price of oil (helped by a weaker dollar and Mideast tensions).
GOLD BREAKS OUT TO SIX YEAR HIGH... Recent messages have suggested that falling bond yields, and a weaker dollar, are bullish intermarket signs for gold. And they certainly were this past week (thanks to statements from the Fed and ECB). The monthly bars in Chart 4 show the price of gold nearing $1400 for the first time since 2013. The chart shows that gold has been forming a potential bottom since late 2015. This week's upside breakout is a bullish development for the yellow metal. The green bars show the close correlation between bullion and the Japanese yen which hit a 52-week closing high this week (aided by the fact that Japanese yields have fallen less than other developed markets over the past year, especially the U.S.). The rising yen also reflects a weaker dollar which lost ground against all major foreign currencies this week. [The Canadian Dollar got a boost from the spike in oil. EM currencies also had a strong week led by the South African rand (gold) and the Russian ruble (oil). including the Chinese yuan]. Gold miners rose with gold and also had a breakout week.
The weekly bars in Chart 5 show the VanEck Vectors Gold Miners ETF (GDX) rising to the highest level since 2017 (and on rising volume). The fact that the GDX weekly gain of +8% was nearly double gold's +4.1% gain is a positive sign. As explained in a previous message, gold shares usually rise faster than the commodity when the metal is in an uptrend. As it now appears to be.
