USA
US politicians finally managed to suppress their egos sufficiently to come up with a robust stimulus package. The US government is preparing to provide $2 trillion in financial stimulus to do all the things that Bojo and Squishy are doing in the UK.
This went down extremely well with investors who have been holding out for news of this nature. The likes of Boeing made massive gains after having been pummelled for weeks. By the end of the day, the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite closed between 11.4% and 8.1% higher. But, of course, they still have a very long way to go before they recover this year’s losses of approaching 30%. That’s going to take many months not just a few days.
Asset prices are on a hair-trigger at the moment. Virus case increases send them down and stimulus measures usually, but not always, send them up. To date, the virus cases have the greatest power, so my inkling is to tread with caution until we’ve seen what looks like a peak in new cases in the US and Europe.
The demand for bonds is swinging as people digest the implications of massive stimulus. The stimulus measures can lift sentiment, and that tends to reduce demand for bonds. Lower demand means lower prices and higher yields (the price and yield of a bond always move in opposite directions).
However, part of the stimulus is central banks buying gazillions of bonds, and that pushes the prices up and the yields back down. But at the same time, governments pay for much of their stimulus by issuing (selling) bonds. So we’re kind of in a situation where the government is selling loads of bonds which central banks are buying in large quantities. In short, calculating the genuine, underlying value of bonds is pretty flippin difficult at the moment.
I’d say that this was reflected in yesterday’s muted gain on the yield of the benchmark 10-year Treasury (US government bond). Its yield has been bouncing between 1.5% and 0.5% lately. But, yesterday, it only nudged up a touch (in relative terms) as folk try to work out what it should be worth.
While all this was going on, the US posted some macroeconomic data. The purchasing managers’ index (PMI) numbers show what is expected to happen over the coming 30 days. PMI numbers for the general outlook of the US economy ain’t good or surprising: the Composite PMI number is down to 40.5 from 49.5. A number below 50 indicates expected contraction and the numbers are usually between 48 and 52. So the inevitability of the current situation is starting to play out through the data.
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