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Everyone’s a Winner in Brexit Aftermath as Doves Rescue Market

Bloomberg logoBloomberg 2/07/2016 Eliza Ronalds-Hannon and Dani Burger

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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 U.K.’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 U.S. 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 U.S. Fed -- any assets that aren’t impaired or encumbered are going to do very well.”

Policy Signals

U.S. 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 U.K.’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 U.S. factory output grew last month by the most in a year.

The S&P 500 Index has rallied 5.2 percent 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 Inc. index of the most shorted stocks in the Russell 3000 Index rose on Wednesday by the most in more than six years.

Central-Bank Liquidity

“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 Inc. 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.”

Even as equities rally, few signs point to a reversal for Treasury yields. Since the Brexit vote, strategists have slashed their U.S. yield forecasts for this year and next, and futures traders virtually erased bets on a Fed rate hike in 2016. A lower-for-longer scenario encourages investors to buy Treasuries that mature in decades. 

The tally of negative-yielding sovereign debt worldwide means investors are effectively paying to own government bonds.

Japanese benchmark yields extended their push below zero this week as some economists predicted the central bank will add to its record stimulus program.

Benchmark German yields fell below zero last month, while yields have turned negative for Swiss debt for all maturities out to 50 years.

Economic Data

In the U.S., factory activity expanded in June at the fastest clip in more than a year.

The Institute for Supply Management’s index increased to 53.2 last month from 51.3 in May, data showed Friday. Strengthening indexes of bookings and production, which reached three-month highs, signaled gains would be sustained.

Amid such indicators, the ongoing demand for Treasuries “is really unbelievable,” said William Marshall, an interest-rate strategist in New York at Credit Suisse Group AG, a primary dealer.

“We are watching the equity markets day after day completely unwind last week’s move, and here we are touching all-time lows overnight in yields,” Marshall said.

“There is some reconciling that we are attempting to do, and I’m sure we have some company in those efforts.”

--With assistance from Victoria Stilwell and Liz Capo McCormick To contact the reporters on this story: Eliza Ronalds-Hannon in New York at, Dani Burger in New York at To contact the editors responsible for this story: Boris Korby at, Michael Aneiro

©2016 Bloomberg L.P.

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