July 2016 will write history, without any doubt. The following charts show extreme readings, and the impact of the movements on those charts in the coming weeks should not be underestimated as they will have secular importance!
First, German interest rates (10-Year Yield) sold off and went into negative territory, especially after the Brexit. It goes without saying that negative interest rates in Germany, the leading European country, is BIG news, no matter if mainstream media does not make a big deal around it. Investors are extremely fearful, at least that’s the message of this chart.
It is no coincidence that German yields go negative exactly at a time when the German DAX index falls to secular support. The chart below shows how important the current price level is. If the DAX cannot hold 9200 points, it breaks its 2009 uptrend, which would be an incredibly important development as it could drag down stock markets worldwide.
The U.S. stock market is still flirting with all-time highs. That is a huge divergence with Europe, and it certainly does not reflect the extreme level of fear over in Europe.
Going forward, there are two scenarios (1) Europe recovers from extreme fears and German yields climb higher, resulting in a bounce in the DAX index in which case U.S. stocks will rally easily to all-time highs (the U.S. stock market will be the place to be in that scenario) (2) European fears continue to mount as the DAX breaks its secular uptrend dragging all stock markets lower. Investors will get sufficient clues over the course of July and August of 2016 to understand which of the two scenarios is unfolding.
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