This Market Indicator That Frequently Signals a Recession Just Flashed Red

A trader works on the floor at the New York Stock Exchange in New York City US Dec. 4

A trader works on the floor at the New York Stock Exchange in New York City US Dec. 4

President Donald Trump suggested Tuesday that he could extend a 90-day truce in his trade war with China, while his top White House economic adviser backtracked from the president's announcement that Beijing had agreed to reduce tariffs on USA -made cars.

That pushed MSCI's all-country index down nearly half a per cent.

There was added confusion over when the 90-day truce period, during which the United States and China would hold off on imposing more tariffs, would start. But doubts began soon after along with President Donald Trump threatening "major tariffs" on Chinese imports if his administration failed to reach an effective trade deal with Beijing.

The Australian dollar AUD=D4 slumped more than 0.7 percent against the greenback as disappointing economic data further dimmed the chance of a rise in rates. "Investors have gone from extended bullishness at the start of the year on equities to an uncomfortable neutrality", said Paul O'Connor, head of multi-asset at Janus Henderson. Stock and bond markets will be closed on Wednesday. The job market is strong, and consumer confidence is still high.

European markets opened lower, with a pan-European index down 1.2 per cent. Losses were led by a 1.6 per cent decline in bank shares, which are being pummeled by the latest declines in long-dated government bond yields.

When the economy is healthy and investors are forecasting good times ahead, they generally demand higher yields for Treasurys that mature a decade or more into the future than those maturing in a year or two. A separate spread between 3-month and 10-year Treasury securities, considered by some as a better recession predictor, was also falling, though at just around 0.5 percentage point it remained comfortably in positive territory. But long-term bond yields have been lower this year, amid concerns about the US economic outlook in coming years.

On Monday, the difference between the two-year and 10-year Treasury yields dropped to just 0.15 percent, its lowest level since prior to the last US recession.

Stock Selloff Continues Amid Worries Over U.S.-China Tensions
Canadian authorities said Wednesday that they have arrested Meng for possible extradition to the United States. Canadian authorities arrested Meng Wanzhou , the chief financial officer of Chinese telecom giant Huawei .

The flattening of the curve gained momentum after last week's signal by the Federal Reserve that it may be nearing an end to its three-year rate-increase cycle.

For the first time in a while, stock market investors are being spooked this week by what's happening in the bond market. But it has the bond and stock markets both anxious that the classic two-year/10-year inversion is also coming.

The pound was down 0.3 percent at US$1.2703 having touched a 17-month low of US$1.2659 overnight, rattled by Brexit setbacks in parliament.

The dollar has been undermined by the bond market moves and recession fears, but it has recovered from two-week lows against a basket of currencies to trade around 97, also flat on the day.

Oil prices fell, weighed down by swelling USA inventories and concerns that slowing economic activity will sap demand for commodities.

USA crude futures were down 1.7 percent at US$52.35 per barrel and Brent shed 1.75 percent to US$61.00 per barrel.

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