Wednesday, 12 December, 2018

Asian stocks fall as declining US yields, trade woes knock sentiment

Scott Olson  Getty Scott Olson Getty
Laurie Berry | 08 December, 2018, 03:49

Markets across the world have been rattled by recession fears, exemplified by the flattening U.S. Treasury yield curve.

The greenback, which started the week on a weak footing as the apparent thaw in trade tensions between the US and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the USA yield curve in bond markets.

In short, a yield curve is a way to gauge the difference between interest rates and the return investors will get from buying shorter- or longer-term debt.

A typical yield curve includes much higher interest rates for maturities further into the future.

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Asian stocks slid on Wednesday, dragged down by Wall Street's tumble as sharp declines in long-term U.S. Treasury yields and resurgent trade concerns stoked investor worries about global economic growth.

Yield curve inversions are seen generally as precursors of a recession. On Monday, the yield on the five-year Treasury note slipped below yields on shorter-dated three-year notes, according to a report in Bloomberg.

The dollar index fell 0.07 percent, with the euro down 0.1 percent to $1.1341.

According to the Cleveland Federal Reserve, an inverted yield curve has preceded the last seven US recessions.

No, at least not yet. That signalled to some investors an approaching USA economic slowdown. A rate hike however, while signaling confidence by the Fed, would continue to make financing more expensive for firms and households.

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German 10-year yields are also being pushed down by domestic concerns, Commerzbank's Rieger said, with European growth indicators sagging and Italian political concerns rumbling on in the background.

Global stocks sank and the dollar fell on Tuesday as a flattening Treasury yield curve sparked recession warnings, while optimism that the US and China would quickly resolve their trade dispute dwindled.

The MSCI's all-country index shed 0.5 percent.

Of course, that's still "pretty doggone tight", said Randy Frederick, vice president of trading and derivatives at Charles Schwab.

The Dow Jones Industrial Average fell 799.36 points, or 3.1 percent, to 25,027.07, the S&P 500 lost 90.31 points, or 3.24 percent, to 2,700.06 and the Nasdaq Composite dropped 283.09 points, or 3.8 percent, to 7,158.43.

While Fed officials have begun pointing to "headwinds" from slowing global growth and other risks, it won't be clear how much this has changed their outlook until they issue fresh economic projections after the December 18-19 policy meeting. That particular inversion has preceded every recession since the late 1970s.

Whether or not the 3-month to 10-year spread inverts may very well depend on how many more hikes the Fed gets in.

Even if the more important parts of the yield curve flip to inversion, that doesn't mean a recession will happen the next day.

Bob Michele, who heads global fixed income for JP Morgan's investment arm, said he doesn't expect the USA yield curve to invert, but he was watching it closely.

Actually, I expect a recession before that portion of the curve inverts.

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