(ĐTCK) Gold prices increased sharply, speculative stocks also increased strongly signaling confidence about economic recovery, but besides that the US dollar has just had the worst month in a decade.
The shift of investment channels is quite chaotic and does not tend to be uniform.
Real interest rates (interest rates after adjusting for inflation) are a long-standing concept in emerging markets. And there is also interest in the United States as rising consumer spending in the United States is forecast to outstrip bond yields, which makes the US dollar depreciate as inflation continues to rise, but can boost the stock market’s momentum.
The real interest rate is at a record low of -1%, showing the loss for investors holding 10-year government bonds. This interest rate is also maintained by the Fed in the near future to support the economic recovery.
Real interest rate chart in the US over the years
“Historically, real interest rates have never caught the interest of many people but this changed when interest rates rose in late 2018 and created a strong sell-off in the stock market. Currently, the perception of low real interest rates is a positive thing for stocks, similar to precious metals. All of these channels are related to each other, ”said Nathan Thooft, portfolio manager Manulife Investment Management.
This also helps explain the cause of the stock price rise despite the worst US economy recorded. Lower borrowing costs make stock valuations more attractive. As a result, the P / E ratio to 35 of the Nasdaq 100 is higher than at any time since the dotcom bubble.
Conversely, lower yields could reduce lending margins and the S&P 500 Financial had a bad trading week in the past week after Fed Chairman Jerome Powell on Wednesday (July 29) emphasized that the Fed never thought of raising interest rates.
The chart shows the correlation between the S&P 500 and the 10-year government bond yield
The Fed chairman also said that the agency will publish the report of strategic evaluation results in the near future. Economists are consolidating expectations for the interest rate path announced in September with the assumption of continuing to extend overnight interest rates to near zero.
According to Evercore ISI strategists, negative real interest rates have not appeared in a long time in the US. They said that the negative real interest rate environment is positive for the value stocks, which have performed worse than the recent market rally.
However, real interest rates are not the only driving force. According to John Zaller, chief investment officer of Mai Capital Management, there has been a wave of speculation on gold and silver. Gold soared about 25% in four months, reaching a record high of about $ 1,975 an ounce on Friday (July 31). Silver also increased 74%, to an all-time high since 2013.
Spot gold price chart and dollar index of Bloomberg
Besides, there is a sharp decline of the USD. The Bloomberg Dollar Spot Index was down more than 9% from its March high due to the increase in EUR due to the EU’s unprecedented joint stimulus package.
The increase in Covid-19 cases in the US has made the US dollar less attractive compared to other developed countries’ currencies.
However, the S&P 500 still increased by 1.7% last week despite the US GDP of the second quarter declined by 32.9%. In addition, there is a strong divide between the Republican and Democratic Party in the National Assembly on the financial package to maintain support for the economy after the expiry of the previously issued aid package.
The Fed also continued to commit to keeping the interest rate policy close to zero in the past week into a series of special credit and liquidity support programs.
“This is a scenario that decides 90% of the market’s direction. Accordingly, the US dollar will continue to weaken and push up the price of other investment channels including stock prices, ”said Michael O’Rourke, a leading market strategist at JonesTrading in Stamford, Connecticut.