Stocks Indexes Drop As Bond Market Flashes Recession Warning

Roman Schwartz
March 25, 2019

Earlier, Germany reported that domestic manufacturing contracted further in March, driving the benchmark 10-year USA government bond below zero and adding to fears of a global slowdown in growth.

The wave of buying that's cut the 10-year yield by almost 20 basis points in the last couple of days has global catalysts, too. "While an inversion has [preceded] each recession over the past 50 years, the lead time is extremely inconsistent, with a recession following anywhere from 14-34 months after the curve goes upside down".

The data compounded worries about the USA economic outlook after the Fed on Wednesday adopted a more dovish than expected stance, anticipating no further interest rate hikes this year and planning an end to its balance sheet roll-offs.

The gap between the 3-month and 10-year yields vanished as a surge of buying pushed the latter to a 14-month low of 2.416 percent.

Citi is one of the most worldwide of the USA banks, deriving 40% of consumer banking revenue from outside of the US, and it can ill-afford to see its reputation take a hit in Asia.

"Our various models do see an uptick in recession probability but are flashing yellow versus red", said Dan Ivascyn, group chief investment officer at Pacific Investment Management Co (Pimco) in Newport Beach, California.

That's why warning lights started flashing Friday morning when the yield on the 10-year Treasury note slipped below that of the three-month bill.

The flattening yield curve, or the difference between short- and long-term rates, has anxious investors for months.

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"The stock market may not agree with the recessionary message from the Treasury market, but it would be foolish to disregard this bond curve move entirely", he wrote.

The dollar index rose 0.14 per cent, with the euro down 0.69 per cent to US$1.1295 (RM4.59).

Meanwhile, an unusual move in the USA bond markets also made investors fearful.

Wall Street followed European shares lower and deepened its losses as the day wore on, even as strategists said a recession would take some time to materialize or could even be averted.

However, the challenges for the economy remain.

It's not just in the US where investors see weaker growth. "That's the last thing that's holding us up", Boockvar said. "I don't think this is a cause for panic". This article is strictly for informational purposes only. You could lose all of your deposited funds.

Markets in the United Kingdom and USA have tumbled with analysts attributing the drop to growing fears of a global slowdown. Over the course of his career, he has worked with some of the world's leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC, Fox Business, and Bloomberg. He holds a BA in Economics from Rutgers University.

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