If we take the axiom: Capital flows where it’s treated best, then we have the basis for the run up in the US equity markets since Brexit.
Institutional investors are pulling funds out of bonds, where capital is treated like trash with more than 50% sovereign funds having yields trading below zero percent.
We have Wall Street’s bulge bracket banks firing entire bond desk teams, due to the fact that the cannot find a profitable way to trade bonds.
The central banks are very accommodating by weakening their currencies and jawboning the markets with talk of further easing. The Bank of Japan is talking about helicopter money to spur growth.
This comes as PM Abe was re-elected this week. The BOJ doesn’t even have to pull off the easing it just has to talk about it for yen to weaken further to power the carry-trade for US stocks.
That carry trade is buying US equities in yen to get a bigger position since 100 yen equals a dollar.
All these actions are pushing capital into the equities market. This is why we are setting new all-time highs on many indices in the US.
Can this continue over the summer?
Hard to say yes with European banks having a crisis in confidence as liquidity dries up this makes further lending to fund current operations far more difficult.
Also on the horizon are the political conventions this month, where the US may not put its best face forward to the world as riots will probably mar the process.
But again, capital will find the best place and it won’t be under the mattress.