It didn’t take long for the trade truce euphoria to completely disappear, highlighting just how sensitive market sentiment remains towards trade developments. Wall Street experienced a dismal session as fears of ongoing trade issues and an economic slowdown came back with a vengeance. The Dow dived 799 points, the S&P tumbled 3.2%, dropping through its 200-day moving average, and the Nasdaq dumped 3.8% to close back in correction territory, in what was the worst session since October’s rout.
As yields on the three-year Treasury note surpassed those of the five year in a yield curve inversion, already jittery investors ran from riskier assets. Stocks got smashed with financials the worst performers whilst the defensive utilities were the only gainers. Flows into safe havens rose dramatically. The Japanese yen was a clear winner overnight, heading back towards 112.
Inverting yield curve = recession
Signals from the Fed last week that it could be close to the end of its hiking cycle pushed the US 10-year Treasury yield to a 3-month low, below 3%. Concerns over the slowing of economic growth caused the yield curve to flatten and then inverse, whereby longer-dated yields fall more quickly and then below shorter-dated yields. This bond market phenomenon is a clear sign that slowing economic growth is a primary concern for the markets, even as US economic data surprises to the upside. On more occasions than not, an inversion of the yield curve has preceded a recession, a significant enough statistic to keep investors on edge.
Asian markets took the lead from Wall Street, tumbling overnight. European bourses are pointing to heavy losses on the open, although US futures pushing higher could offer some reprieve.
Pound Heads Lower as Investors Digest Double Hit on May
After closing flat versus the dollar in the previous session, the pound has fallen through support at $1.27 hitting a 17-month low, in early trade on Wednesday. Volatility in the pound has picked up considerably, reflecting the sensitivity of sterling to Parliamentary headlines, which will continue to be the case across this week.
Theresa May being found as the first Prime Minister in contempt of Parliament hammered her already weak authority. Her authority was eroded further as Parliament voted to give themselves increased powers in the case of a rejection of Theresa May’s Brexit deal. Whilst this is a blow for Theresa May, it should help the UK avoid a hard-disorderly Brexit, something few MP’s or pound traders actually wish to see. Given the doomsday predictions in the case of a no deal Brexit from the BoE, the fact that the pound is still falling, even though the chances of a no deal Brexit have receded shows just how uncertain pound traders are about anything Brexit right now. Developments are fast-moving, and political risk remains extremely elevated.