Published: Sat, December 08, 2018
Markets | By Erika Turner

Asian stocks fall as declining USA yields, trade woes knock sentiment

Asian stocks fall as declining USA yields, trade woes knock sentiment

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.

The greenback, which started the week on a weak footing as the apparent thaw in trade tensions between the USA and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the US yield curve in bond markets. It has sometimes taken more than a year for a recession to occur after the yield curve inverts.

The yield curve "tells me that it's wise to be patient here", Kaplan told Reuters in Laredo, Texas where he is meeting with business leaders and bankers.

The Australian dollar AUD=D4 slumped more than 0.7 percent against the greenback as disappointing economic data further dimmed the chance of a rise in rates. Most economists are forecasting the US economy will continue to grow in 2019, though at a slower pace than this year.

And, even if the latest kink in the yield curve is indeed the first signal of a downturn as many suspect, it does not indicate when it will actually begin nor how severe it will be.

The Fed has already hiked rates three times this year with plans for an increase in December and potentially as many as three more next year.

The recent weakness in the dollar comes against the backdrop of a temporary truce in the U.S. A hint at rate cuts coming down the pipeline would offer much needed breathing room for emerging market (EM) currencies and move funds from USA government bonds to other havens of interest returns causing them to appreciate against the dollar.

Though it is not certain the narrowing in spreads is related to doubts about economic growth, alternate explanations would not necessarily be helpful to the Fed either.

United States three- and five-year Treasury yields have inverted, while the two-year and 10-year benchmark is flattening.

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MSCI's gauge of stocks across the globe shed 2.16 percent, its worst performance since October 11.

But since then, it has persistently declined, especially since the middle of last week, and now is at its narrowest since July 2007, on the eve of a steep recession.

The yield curve inverted between the two- and 10-year yield before the recessions of 1981, 1991, 2000, and 2008.

"It's a sloppy predictor because at some point after yield curve inversion you could get a recession that could be one year, two year, three years", said Nicholas Colas, co-founder at DataTrek Research in NY.

Whatever the situation with the Fed and the USA markets, emerging markets may be effected even more than the US economy.

A typical yield curve includes much higher interest rates for maturities further into the future.

If that inversion happens, investors should prepare for a potential US recession as soon as mid-2019.

Last year's massive federal tax cut has bolstered business confidence, but trade tension between Washington and major US trade partners looms as a possible economic drag, analysts said.

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