Investors hear 3 words they fear: inverted yield curve

Investors hear 3 words they fear: inverted yield curve

Hong Kong's Hang Seng retreated 1.55 percent and the Shanghai Composite Index dipped 0.2 percent. The pan-European STOXX 600 index lost 1.16 percent. The mood further soured after data showed Australia's third-quarter growth fell short of expectations.

The Australian dollar, viewed as a barometer of Chinese growth, gave up early gains to trade 0.26 percent lower.

The Dow retreated 3.1 percent and the Nasdaq sank 3.8 percent on Tuesday.

Italian bond yields have dropped in recent days on hopes that Italy will reach a compromise with the European Union on its budget.

Following Wall Street's overnight tumble, S&P e-mini futures nudged up 0.4 percent in Asian trade on Wednesday. As the spread between two- year and 10-year securities neared zero, the gaps between some other yields, including the two year and three year, were already upside down.

On Tuesday the yield curve signaled caution and, along with worries about global trade and interest rates, it helped send the stock market to one of its worst days of the year. Normally the longer term a project or a financial investment, the higher the return, simply because there is more uncertainty and thus more risk.

Also, Benchmark 10-year Treasury yields dropped to a lowest point since mid-September, and shrinking yields have lead investors to question an economic slowdown.

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"Investors are coming around to our downbeat view of the prospects for the USA economy", analysts at Capital Economics wrote on Tuesday, arguing that there was no reason to regard this pending yield curve inversion as different from others.

It's the first time any part of the yield curve has inverted since 2007, before the start of the Great Recession. An inversion in that part of the curve has preceded each of the last seven recessions. It reflects the idea that the Fed is slowly hiking the economy into recession. "That said, it is true that the economic outlook is murkier than before", said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management. Adding to the risk aversion was news that U.K. Prime Minister Theresa May's push to avoid a so-called "hard Brexit" may be at risk.

Yields had risen earlier after a deal between the United States and China to hold off on new tariffs boosted stocks and reduced demand for safe haven USA debt.

Recessionary pressures could be exacerbated if fears surrounding the US-China trade war are resumed following a 90-day truce, agreed at the G20 in Argentina last week.

Oil prices pared some gains as fears flared that demand would stall due to a trade war between the USA and China, and that Russian Federation remained a stumbling block to a deal to cut global crude supply.

It rose 0.2 per cent to 113 yen after losing 0.75 per cent the previous day against the safe-haven Japanese currency. The US dollar decreased to 0.9974 Swiss franc from 0.9988 Swiss franc, and it was up to 1.3247 Canadian dollars from 1.3210 Canadian dollars.

Oil prices fell, weighed down by swelling USA inventories and concerns that slowing economic activity will sap demand for commodities. US light crude was last up 30 cents at $53.25.

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