Stocks fall as declining USA yields, trade woes knock sentiment

Federal Reserve

Federal Reserve

Global equities have been shaken as a flattening US Treasury yield curve - a result of a steep fall in longer-dated yields - fanned recession jitters and as US-China trade conflict woes resurfaced after a temporary lull. But when investors are anxious that growth will fall off sharply, perhaps as a result of the Federal Reserve pushing short-term rates higher, they're willing to accept less in interest for a Treasury maturing far in the future.

These were the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt. A year ago, the cushion was at 0.62 percentage points.

The inverted yield curve persists for a second day.

The yields on five-year Treasury notes fell below those on three-year notes on Monday - that hasn't occurred since 2007. -China trade tensions appeared to ease one risk Fed officials had seen on the horizon, the action in the bond markets raised another.

The MSCI's all-country index shed 0.5 percent. The pan-European STOXX 600 index lost 1.16 percent.

"The focus is now shifting to the inverted U.S. bond yield curve, which has negative connotations, while implying the USA economy is heading towards what was, only a few weeks ago, an improbable economic slowdown", said Stephen Innes, head of trading for APAC at Oanda. By December 5 afternoon, the five-year yield was at 2.78 percent, 0.01 percentage points lower than a two-year Treasury and 0.02 points lower than a three-year Treasury.

The yield curve shows the returns on bonds of different maturities, from a few months on the so-called short end to as long as 100 years on some corporate bonds. The Fed may try to reassure markets that the economy is doing well and that it is not anxious by continuing with their planned rate hike of a 25 basis points or they may single a delay of the hike.

In August, the San Francisco Fed said in a study that the historical correlation between the yield curve inversion and recessions do not confirm "cause and effect". 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. The developments again called into question the extent of a trade agreement the White House said Trump had struck with Chinese President Xi Jinping over dinner at the Group of 20 summit on Saturday.

Oil prices pared some gains as fears flared that demand would stall due to a trade war between the United States and China, and that Russian Federation remained a stumbling block to a deal to cut global crude supply. This is seen as a portent of a US recession.

Trump's comments, alongside the drop in US stocks and bond yields, pushed Asian shares outside Japan 1.4 percent lower.

The pound rose off 17-month lows of $1.2659 hit on Tuesday to around $1.2751, up 0.3 percent on the day, amid creeping optimism that Britain could opt to stay in the European Union after all.

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

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