Markets finished the week with a thud thanks to a sharp selloff in Europe. The Dow finished lower by 110 points to 17,874. Trading volume was heavy as exchanges in Germany and France were down as much as 2%. For the week the Dow gained about 0.28%.
European investors flocked to safety sending Interest rates on Europe debt to fresh lows with the yield on the 10 year German gubment bond hitting 0.011%. These low yields show not only a flight to safety in Europe but reveal a trend of increased foreign buying of US corporate, municipal and govt. debt. 10 year US Treasury bonds yield about 1.6% which is much better than the yield on German bonds. Along with the drop in Euro Zone yields, shares of European banks are down as well. Deutsche Bank, the largest bank in Germany, fell back to recent lows along with other big European banks like Barclay’s, Royal Bank of Scotland and Banco Santander.
Polls show that Europe may be on the verge of upheaval and the EU might not survive the month if Britain leaves. This event is remarkable and the stakes are high! The London paper The Independent started the selloff in markets when it published a poll saying that respondents favor a Brexit by a margin of 55% to 45% of those polled. While growth in the EU could decline and affect US exports to Europe, institutional investors in the EU have been moving money into US bonds thereby benefitting US bondholders. It’s like owning a house in an area where everyone wants to live. The demand can push the value of your home up even if the overall economy is weak and right now US bonds are a “hot neighborhood”.
The turmoil in Europe helped boost prices for gold. The shiny yellow stuff gained $4.90 an ounce to $1,277. Gold is being boosted by bank purchases amid uncertainty over monetary policy, negative interest rates and fears of a Brexit.
Oil closed off over 3% as WTI crude fell back below $50 per barrel to $49.03.