Published: Thu, December 06, 2018
Finance | By Loren Pratt

Stocks fall as declining United States yields, trade woes knock sentiment

Stocks fall as declining United States yields, trade woes knock sentiment

U.S. President Donald Trump on Tuesday held out the possibility of an extension of the 90-day trade truce with China but warned he would revert to tariffs if the two sides could not resolve their differences. The spread between the 10-year yield over its 2-year counterpart also shrank to the smallest since the start of the financial crisis in January 2008, signaling to some investors an approaching USA economic slowdown.

The spread between the two-year and 10-year Treasury yields was at its flattest level in more than a decade and edging closer to an inversion, when long rates fall below short rates. As the spread between two- year and 10-year securities neared zero, the gaps between some other yields, including the two year and three year, were already upside down.

The pan-European STOXX 600 index lost 0.76 percent. Most economists are forecasting the US economy will continue to grow in 2019, though at a slower pace than this year.

USA two-year Treasury yields rose above three-year Treasury yields on Tuesday for the first time in more than a decade as traders piled on bets the Fed might be close to ending its rate-hike campaign.

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

It rose 0.2 per cent to 113 yen after losing 0.75 per cent the previous day against the safe-haven Japanese currency. In recent weeks expectations about what the Fed will do next year have eroded, with investors now anticipating policymakers will raise rates only one time next year, and, coupled with an expected increase in December, pause with a federal funds rate of around 2.7 percent.

What exactly is a yield curve, and why is it inverting?


It has sometimes taken more than a year for a recession to occur after the yield curve inverts. Powell in remarks last week reiterated his upbeat outlook of an economy growing above potential, with the unemployment rate the lowest in almost 50 years, and in no need of emergency level interest rates.

The yield on the five-year Treasury dropped below the two-year and three-year Treasury yields on Monday.

British Prime Minister Theresa May suffered embarrassing defeats on Tuesday at the start of five days of debate over her plans to leave the European Union that could determine the future of Brexit and the fate of her government. Shanghai markets fell 0.6 per cent, their losses limited by Chinese officials expressing confidence that a trade deal would be clinched on time. 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.

The pound touched 17-month lows of $1.2659 on Tuesday, then recovered to trade around $1.2734 on Wednesday, flat for the day.

The threat of slowing economic activity also weighed on oil prices, but oil prices went higher on Wednesday ahead of a meeting of the world's biggest exporters who will discuss cutting output to help shore up prices and curb excess supply.

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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