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One week after Brexit, the lesson investors are taking away is that there's no problem central banks can't fix.
Just days after the UK's vote to leave the European Union roiled financial markets around the world, stocks and bonds surged in tandem this week as policy makers once again rode to the rescue, dropping hints of further stimulus and suggesting they'll keep interest rates lower for longer.
Traditionally, what's good for one asset class has not been good for the other, and stocks and bonds more often move in opposite directions on the same information. Yet with unprecedented monetary easing showing no signs of slowing, that relationship continues to break down. With almost $12 trillion of government bonds globally paying less than zero, a rush into Treasuries Friday pushed yields to record lows, even as encouraging economic data helped propel US stocks toward all-time highs.
"This may be the new normal," said Aaron Kohli, a fixed-income strategist in New York at BMO Capital Markets, one of 23 primary dealers that trade with Fed. "If you flood the markets with liquidity, and you have the anticipation that the central banks are going to be dovish - either adding to quantitative easing or becoming less hawkish, as the case may be for the US Fed - any assets that aren't impaired or encumbered are going to do very well."
US investors rushed back into equities this week following a two-day rout that wiped out more than $1 trillion in value, lured by signals that policy makers stand ready to act if the UK's decision to leave the EU threatens global expansion. A growing sense that the world's largest economy wouldn't be harmed by the turmoil in Britain was reinforced Friday by data showing US factory output grew last month by the most in a year.
The S&P 500 Index has rallied 5.2 per cent in four days, all but erasing the post-Brexit swoon. The index recorded its best week since November after capping a third quarterly advance.
Some of the snapback in stocks came as investors unwound bearish bets put on ahead of the referendum and during its immediate aftermath. A Goldman Sachs Group index of the most shorted stocks in the Russell 3000 Index rose on Wednesday by the most in more than six years.
"Some of it is a reflection of how much liquidity is out there, still chasing returns despite the initial spike in uncertainty that Brexit created," Matthew Kaufler, a portfolio manager with Federated Investors who oversees funds with about $2 billion assets, said by phone. "The central banks around the world have been extra accommodative and they're reinforcing, if not doubling down on, that stance. That's positive for financial assets, at least for the time being."
