Saturday, 21 September, 2019

Dow drops 800 after bonds flash warning

30-year Treasury slumps to historic low as recession fears spike ASX tumbles $60 billion on US recession, China slowdown fears
Ginger Lawrence | 18 August, 2019, 14:23

As TheStreet reported yesterday, although yields "subsequently rose to 1.592% for the 2-year Treasury and 1.596% for the 10-year note, putting the curve's slope back into positive territory", it was not enough to prevent "a big sell-off in USA stocks, with the Dow Jones Industrial Average falling some 800 points". The S&P 500 index dropped almost 3% as the market erased all of its gains from a rally the day before.

The S&P dropped 85.72 points, or 2.9%, to 2,840.60, while the Nasdaq fell 242.42, or 3%, to 7,773.94. Citigroup sank 5.3% and Bank of America gave up 4.7%.

Reacting to the stock market slide, US President Donald Trump has turned his Twitter guns on "clueless" Federal Reserve Chairman Jay Powell, blaming his refusal to cut interest rates for the "crazy" inverted yield curve of bonds.

In March, the inversion of the USA yield curve hit 3-month T-bills for the first time in about 12 years when the yield on 10-year notes US10YT=RR dropped below that for 3-month securities.

But Walmart Inc WMT.N reported strong second-quarter results and raised its earnings expectations for the year, while USA retail sales increased 0.7% last month after gaining 0.3% in June, the Commerce Department said. US crude CLc1 settled down 76 cents to $54.47.

Investors are spooked by a scenario known as the "inverted yield curve", which occurs when the interest rates on short-term bonds are higher than the interest rates paid by long-term bonds.

The CBOE volatility index, a gauge of investor anxiety, jumped 4.58 points to 22.10.

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Dire economic data from China and Germany suggested a faltering global economy, stricken by the increasingly belligerent US-China trade war, Brexit woes and geopolitical tensions.

"Yield curve inversion is flashing a warning sign - investors should check their portfolios are resilient. The Fed still owns roughly two trillion USA dollars of US treasuries from its quantitative easing program", Falconio told Xinhua.

So when the Fed has clearly telegraphed that it is about to cut short-term interest rates, it makes ideal sense that long-term bond yields would fall in anticipation of those cuts.

The Dow crashed by 660 points on Wednesday.

All the focus is on the USA, but we're seeing the Aussie 2s vs 10s curve about to invert. "Instead, its signal about the health of the economy is what matters, and it is not as negative as some investors fear", said Haefele. As we can see, after inversion, it doesn't take long before steepening plays out here (i.e. 2-year yields falling faster than 5-year bonds), and this is taking place right now.

On Wednesday, it briefly fell below the two-year Treasury's yield for the first time since 2007. This is perceived as a signal of an nearly imminent recession in the coming months, as over the past 50 years it provided only one false signal of such outcome. "The only policy response is from central banks, hence the market is rallying", Schaffrik added. The same thing happened in the US. We had a panic-type sell move.

"Given the continued strong employment picture and healthy US consumer, there could still be time for this economic cycle to have plenty of life left". "We can all debate whether those signals are as accurate as they once were, but we still seem to be in a slow grind lower for sentiment and momentum and need some positive surprises to change those trends".