· The yen held gains against major currencies in early Asian trade on Thursday as growing signs of a global economic slump and falling Treasury yields drove investors into safe-haven assets.
Gold prices also edged higher as investors fled stocks and sought safe-haven assets after the U.S. Treasury yield curve inverted for the first time in 12 years and U.S. stocks sold off sharply.
The inversion, where 2-year yields trade higher than 10-year yields, is considered by some analysts to be a sign that the U.S. economy is likely to enter a recession.
In a worrying sign for investors, 10-year Treasury yields slumped to the lowest in three years in Asian trade while 30-year Treasury yields broke below the 2% floor for the U.S. Federal Reserve’s policy rate.
Sentiment was already fragile after economic data from China and Germany revealed the extent of the damage the U.S.-Sino trade war is causing two of the world’s largest exporters.
· The dollar index, which measures its value against a basket of six major currencies, stood at 97.955 after a 0.2% gain on Wednesday.
The U.S. Treasury yield curve inverted on Wednesday for the first time since June 2007.
In Asian trade, 10-year Treasury yields skidded to the lowest since September 2016 and 30-year Treasury yields fell to an all-time low of 1.9910%.
· The U.S. yield curve was inverted for the second straight trading session on Thursday, as investors’ concerns that the world’s biggest economy could be heading for recession deepened. US2US10=RR
Thirty year U.S. Treasury yields hit a new low of 1.98% US30YT=RR, having fallen 27 basis points this week, the biggest one-week fall since May 2012.
· EUR/USD is on the defensive, having charted a bearish lower high above 1.12 in the last few days and could see a deeper drop to 1.10 in the short-term on rising German recession fears.
The spread between the German 10- and two-year Bund yields narrowed to 22 basis points on Tuesday, the lowest level since 2008. More importantly, the spread has dropped more than 60 basis points this year.
The relentless flattening of the yield curve to the levels last seen in 2008 indicates the recession fears are rising and investors are losing hope of a sustained rise in inflation and growth.
· Former Federal Reserve Chair Janet Yellen said the markets may be wrong this time in trusting the yield curve inversion as a recession indicator.
“Historically, it has been a pretty good signal of recession, and I think that’s when markets pay attention to it, but I would really urge that on this occasion it may be a less good signal,” Yellen said on Fox Business Network. “The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.”
When asked if the United States is headed into a recession, Yellen said: “I think the answer is most likely no. I think the U.S. economy has enough strength to avoid that, but the odds have clearly risen and they’re higher than I’m frankly comfortable with.”
Yellen is not the only other former Fed chair who is weighing in on lower yields. With more than $15 trillion of government bonds trading at negative interest rates worldwide, Former Federal Reserve Chairman Alan Greenspan said Tuesday that “there is no barrier” to negative yields in the U.S.
“There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,” Greenspan said in a phone interview with Bloomberg. “There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, beside being a certain level.”
· Fears are rising that a recession looms after a closely watched market metric flashed a warning signal, but one strategist told CNBC the supposed indicator “predicts absolutely nothing.”
Viktor Shvets, head of Asian strategy for Macquarie Commodities and Global Markets, brushed off those concerns.
“My view has always been that yield curve predicts absolutely nothing,” he told CNBC’s “Squawk Box” on Thursday.
“What it does tell you (is) that you will have a recession if you don’t do something about it,” Shvets added.
The yield curve inversion, he said, may demonstrate that the global economy is slowing down. That’s because of a lack of liquidity, absence of reflationary momentum and a de-globalization of trade and capital flows, according to Shvets.
“If you reverse those elements, then the yield curve will respond very quickly,” the strategist said, adding that, to him, “recession equals policy errors.”
Central banks ‘never run out of bullets’
Weighing in on concerns that central banks may not have enough fuel in their tanks to make their policy count, Shvets said that notion was “nonsense.”
“It has to be made clear: Central banks never run out of bullets, ever,” he said. “There are so many tools that central banks can bring to bear, (other than) just looking at interest rates. ”
· The US Dollar may rise against its major counterparts if critical US data – retail sales and industrial production – point to a weaker economy and greater need for accommodative monetary policy. Stock markets may be buoyed by the prospect of cheap credit, though given the current environment of growing recessionary fears, poor data may only just exacerbate the selloff in equities and stoke demand for the US Dollar.
· Among the superlatives: the yield on 30-year Treasuries fell below 2% for the first time and the world’s pile of negative-yielding debt surpassed $16 trillion. And looming over it all was the 10-year Treasury yield dipping below the two-year, in what’s considered a harbinger of a U.S. economic recession in the next 18 months.
· President Donald Trump blamed the Federal Reserve for mounting fears about a slowing U.S. economy on Wednesday as he defended his administration’s trade war with China.
In a pair of tweets, the president argued the central bank and its “clueless” chairman, Jay Powell, have dragged on the U.S. economy. He also blamed the Fed for the yield on the 2-year U.S. Treasury moving higher than the yield on the benchmark 10-year Treasury — an indicator of a possible recession that contributed to major U.S. stock indexes dropping about 3% on Wednesday.
“CRAZY INVERTED YIELD CURVE!” the president wrote. “We should easily be reaping big Rewards & Gains, but the Fed is holding us back. We will Win!”
· Cisco Systems Inc (NASDAQ:CSCO) said on Wednesday that impending U.S. tariffs and Chinese customers shunning the networking company's gear were weighing on its business, and it forecast sales and profit below Wall Street targets.
· South Korean President Moon Jae-in said on Thursday that Japan should look back upon its imperialist past but Seoul will “gladly join hands” if Tokyo chooses dialogue, as the two nations deal with an escalating trade row.
· Japanese Economy Minister Toshimitsu Motegi said on Thursday that Japan and the United States were aiming to hold trade talks in Washington on Aug. 21-22, Jiji Press reported.
Motegi had a meeting with U.S. Trade Representative Robert Lighthizer earlier this month at which they made “significant progress” in narrowing their differences on trade. They agreed to hold another ministerial-level meeting in August but did not set a date.
· Hundreds of members of China’s People’s Armed Police could be seen conducting exercises on Thursday at a sports stadium in Shenzhen, as the U.S. State Department expressed concern that they could be deployed across the border in Hong Kong to break up protests wracking the city.
· Oil prices steadied on Thursday, following sharp overnight losses as U.S. crude inventories unexpectedly rose, fears of recession mounted and economic data out of China and Europe disappointed.
Brent crude LCOc1 was down 13 cents, or 0.2%, at $59.35 a barrel by 0643 GMT, after falling 3% in the last session.
U.S. crude CLc1 was up 5 cents, or 0.1%, at $55.28 a barrel, having dropped 3.3% in the previous session.
· WTI whipsawed on forever-changing tradewar and economic growth sentiment
US oil is bing whipsawed from one political headline to the next and on fears of a global slowdown. For that matter, the technical picture is blurred, just as the case for the upside was being built on OPEC support and the bulls were holding just above the 50% retracement of the late Dec to 2019 range.
Earlier in the week, on the bullish spike, the bulls took on the cluster of the 20, 50 and 200 daily moving averages to bust through both the 56 and 57 handles. However, the bears have taken back control on the spike to the downside that took out stops at 54.50 for a 50% mean reversion. The path is open all the way to the 53 handle and the 61.8% retracement target.
· Crude oil prices gained traction after Trump administration announced its decision to delay tariffs on some Chinese imports on Tuesday and the barrel of West Texas Intermediate gained 3.55% to close the day a little below the $57 mark.
Growth fears weigh on WTI
However, following the disappointing retail sales and industrial production data from China and dismal growth data from Germany, concerns over a dismal global economic growth and energy demand outlook weighed on crude oil prices.
The WTI steadily erased Tuesday's gains and met a fresh selling pressure after the weekly data published by the US Energy Information Administration showed that crude oil stocks in the US increased by 1.6 million barrels in the week ending August 9 compared to market expectation for a draw of 2.8 million barrels. At the moment, the WTI is trading at $55, losing 2.8% on a daily basis.
On Tuesday, Kuwait's Oil Minister Khaled al-Fadhel said that Kuwait was fully committed to implementing an agreement between oil-exporting countries to cut production in order to support crude prices. Markets will be looking to see how OPEC+ reacts if demand concerns continue to push prices lower.
Reference: CNBC, Reuters, FX Street
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