דוח חודשי של UBS || "הכלב שלא נבח"

The dog that didn’t bark

 

Sherlock Holmes once solved a murder mystery by noting “the curious incident of the dog in the night-time.” A watchdog didn’t bark on the night of the murder,

leading Holmes to conclude it must have known the culprit. Sometimes the absence of an expected response sheds light on events.

For investors, the dog that’s not barking is the 10-year US Treasury yield and the culprit is Federal Reserve policy. Normally, when equity prices rally and economic indicators point to an improvement in growth, the 10-year yield rises. But despite the sharp rally in stocks and improving economic growth, 10-year Treasury yields have been flat. In this letter, we explore why this anomaly is the key to understanding markets today.

In the past few months, I have used this letter to express the view that Federal Reserve support would be a more important driver for risk assets than COVID-19 or other factors. Is this Fed story over? Not yet, in our view. We think equity markets, certain credit markets, and the US dollar have yet to fully reflect the long-term impact of ultra-loose Fed policy. And although gold prices are now close to our targets, we do still expect higher prices by year-end. We think the 10-year yield is signaling that the Fed will keep rates low for a long time, even if inflation rises. The likelihood of very low rates for an extended period makes investors willing to pay more for a given dollar of earnings. Low US rates reduce the relative appeal of the US dollar. And, by simultaneously reducing the opportunity cost and increasing expectations of long-term inflation, the Fed is leading more investors to turn to assets like gold, whose price is up 27% year-to-date.

the Fed story will of course interplay with news on COVID-19, the buildup to the US election, and US-China tensions as the key market drivers. Yet, as we suggested last month, fears of a second wave of the virus in the US have moderated as hospitalization rates have fallen. While case counts in Europe may rise as people return from summer holidays, the stress on healthcare systems remains low.