USA markets sink, sparking fears of recession

Reuters

Reuters

For the first time in history, the yield on the 30-year U.S. Treasury bond declined below 2%.

Gold, as usual, is the net beneficiary of these moves in yield, and the yellow metal has resumed its bull trend. Long-term bond yields are falling.

It came after Wall Street suffered its worst one-day fall of 2019 on heightened fears of a United States recession, triggering a sell-off across global markets. Lower yields are a sign that USA monetary policy is too tight and the market sees a higher prospect of recession.

The MSCI ACWI, which incorporates readings of 49 equity markets across the world, shed 2.1% to its lowest level since June 4, while E-Mini futures for the S&P 500 lost 0.1% in early Asia. "Now too slow to cut.", Trump tweeted on late Wednesday. "We saw the same type of event happen last week. We are in a new phase of the cycle for markets now".

A financial measurement known as the yield curve inverted on Wednesday morning, causing sections of the financial (and political) press to signal concern for the USA economy.

This is where we get the recession.

"The only question is, can the Fed out-dove the market?" What's interesting is the title of the conference is "Challenges for Monetary Policy,".

Other parts of the yield curve have been inverted for a few months.

The local currency was boosted by stronger-than-expected job figures - which revealed 41,100 new jobs were created in July, with the unemployment rate steady at 5.2 per cent.

Wlson continued: "To recap well-worn turf, this inversion been a reliable indicator of recession many times in the past, calling seven out of the last nine".

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"The curve inversion to this point is flagging a 55-to-60 per cent chance of a US recession over the next 12 months", Kelly said. We can also see how markets reacted here. For instance, three-month Treasurys have been yielding more than 10-year Treasurys since late May. "3m/10yr measures Fed policy". But they are still down 60 basis points in just 12 sessions.

Just ask this trader - it's bad. Meanwhile, central banks are racing to the bottom with rate cuts. Inflation expectations are now headed lower, and this will sit poorly with the Fed and market participants.

The plunge in longer-term yields like the 30-Year are also a symptom of investor anxiety.

"At the moment the US economy is actually growing above trend so they've got a fair way to slow from here", said RBA Deputy Governor Guy Debelle.

Shares of Macy's plunged over 13.2 percent after the USA department store chain reported second-quarter earnings below market estimates.

Moreover, not everyone buys the argument that recession is inevitable, given that bond markets have been distorted by a decade of multi-trillion dollar central bank stimulus.

Mark Haefele, chief investment officer at UBS Global Wealth Management, said how long the curve remained inverted, and to what extent, was crucial. It is often the clearest precursor to aggressive rate cuts from the Fed, which I've highlighted in the lower pane.

Australia's major index was the biggest loser early Thursday. Well, take a look at the KBW banking index.

Roughly, the interest rate on a long-term bond should be the average interest rate on short-term bonds that will prevail during the term of the long bond, plus a "term premium" to compensate the lender for risks associated with lending on fixed terms for a long period.

Chris Weston, Head of Research at Pepperstone.

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