Wednesday August 28th

28-08-2019

Dow set to slide 100 points as inverted yield curve stokes recession fears

U.S. stock index futures pointed to a lower open on Wednesday after a key part of the U.S. yield curve inverted even further, exacerbating fears of an impending recession. At around 8 a.m. ET, Dow Jones Industrial Average futures indicated a loss of 116 points at the open. Futures on the S&P 500 and Nasdaq 100 also pointed to losses at the open. The closely watched spread between the 10-year Treasury yield and the 2-year rate fell to negative 6 basis points Wednesday. The move extended losses from the previous session when the spread registered its lowest level since 2007. Bank of America and Citigroup shares pulled back more than 1% each. J.P. Morgan Chase slid 1.1%. A 10-year rate below the 2-year yield is viewed by fixed income traders as an important recession prognosticator, marking an unusual phenomenon as bondholders receive better compensation in the short term. Meanwhile, the U.S. 30-year Treasury yield fell to a new record low of 1.906% on Wednesday. However, MRB Partners strategist Prajakta Bhide thinks recessionary fears may be overblown. “The yield curve’s inversion this year is a symptom of external growth stress and powerful distortions in global bond yields and does not reflect restrictive Fed policy,” he said in a note. “Thus, it does not warrant a bearish economic interpretation.” “Even if the inverted yield curve captures investor’s uncertainty about worsening global growth ... a balanced perspective would still suggest that that the odds of a recession in the next 12 months are no higher than 20%,” Prajakta added. Market participants were also closely monitoring trade developments between the world’s two largest economies. The ongoing U.S.-China trade dispute has placed an increasing strain on the global economy, prompting policymakers to respond with interest rate cuts and stimulus measures to bolster growth. The White House is scheduled to impose the first stage of U.S. tariffs on $300 billion worth of Chinese goods on Sunday. China is set to respond with tariffs on U.S. products on the same day. Stocks in Asia were mixed on Wednesday following an overnight inversion of a closely watched U.S. Treasury yield curve to its worst level in more than a decade. Mainland Chinese stocks closed lower, with the Shanghai composite declining 0.29% to approximately 2,893.76 and the Shenzhen component down 0.31% to 9,414.00. The Shenzhen composite shed 0.125% to about 1,593.82. Hong Kong’s Hang Seng index was about 0.2% lower, as of its final hour of trading. Elsewhere, the Nikkei 225 in Japan added 0.11% to close at 20,479.42 while the Topix rose fractionally to finish its trading day at 1,490.35. South Korea’s Kospi closed 0.86% higher at 1,941.09. Oil prices rose on Wednesday after industry data showing a fall in stockpiles of U.S. crude somewhat eased worries about subdued demand due to the China-U.S. trade war. Brent crude futures climbed 70 cents to $60.21 a barrel. West Texas Intermediate (WTI) crude futures gained 83 cents to $55.76 a barrel. The two benchmarks are headed for monthly losses of around 8% and 5%, respectively, weighed down by trade barriers between the world’s two biggest oil consumers. Gold eased on Wednesday, after rising over 1% in the previous session on fears of a possible recession, but held close to a more than six-year high on hopes of a rate cut by the U.S. central bank and uncertainties around the Sino-U.S. trade talks. Spot gold was down 0.1% at $1,540.40 per ounce, as of 0724 GMT. On Monday it touched $1,554.56, its highest in over six-years. U.S. gold futures were down 0.1% at $1,550.50 an ounce.