Global recession fears rise, as bond yields invert and Asian equities slump

Mar 25 • Uncategorized • 207 Views • No Comments on Global recession fears rise, as bond yields invert and Asian equities slump

Asian equity markets sold off during the Sydney-Asian trading sessions, as global recession fears stalked markets in: Japan China and Australia. The Nikkei slumped by -3%, Shanghai Composite by -1.97% and the ASX 200 by -1.11%. This pattern followed a sell off, in European and USA equity markets, on Friday March 22nd, which saw up a -2% fall in the U.K. FTSE. At 8:15am U.K. time on Monday March 24th, the U.K. leading index was trading down -0.57%, at 7,165.

The SPX (down -1.90%) and NASDAQ (down -2.50%), sold off sharply on Friday, futures markets for USA equity markets were indicating a fall of -0.38% in the SPX and -0.53% in the NASDAQ, once New York opens on Monday afternoon.

However, despite the sell off in equity indices across the board, some context is required with regards to the rises witnessed (year to date) in 2019. The Shanghai Composite is up 22%, ASX 200 up 8%, Nikkei up 4.80%, NASDAQ up 15.80% and the U.K. FTSE is up 6.57%. The main USA indices have recovered all the losses incurred from the sell off, experienced in the final two months of Q4 2018, the SPX is up 11.72% in 2019.

The inversion of the bond yield curve has been a hot topic of discussion in the financial mainstream media over recent days. The phenomena is represented by shorter term bond yields offering up better returns than longer dated bonds. In short, this could also be indicative that banks would rather take a risk lending money over a short term period to businesses and governments, than longer periods. Traditionally this behaviour is the forewarning of a recession, either globally, or secularly in the USA. The three month yield in the USA is a touch higher than ten year, the last time this axis crossed was in May 2007, before a series of global banking crises hit world trade.

The major FX pairs traded in relatively tight ranges during the Asian and early part of the London-European trading sessions on Monday morning, as currency market analysts and FX traders analysed the falls experienced in: Europe, the USA and Asian equity markets. At 9:15am U.K. time GPB/USD traded down -0.15%, EUR/USD up 0.07%, USD/CHF up 0.06%, AUD/USD up 0.15%. USD/JPY traded up 0.28%, as the safe haven appeal of the globe’s reserve currency, took seniority over the safe haven appeal of yen, as the major pair recovered some lost ground. But USD/JPY is still trading at a low not seen since February 12th, just above the critical psyche handle and round number of 110.00, at 110.36. The dollar index, DXY, was down -0.14% at 96.53.

Despite this week being a critical and decisive week in the U.K. Parliament for the Brexit process, sterling appears to be in a holding pattern, versus the majority of its peers. EUR/GBP traded at 0.858, up 0.28%, trading close to the daily pivot point. The U.K. received a two week stay of execution from the E.U. and will not be legally exiting the union, on March 29th. Instead, it has up to April 11th to prepare for a no deal exit, or up to May 22nd to prepare for an exit based on the WA (withdrawal agreement).

This week will see intense debate and lobbying in the House of Commons to ascertain if there is a concession and consensus available, between all political parties. Therefore, FX traders should continue to remain vigilant to any breaking news. Rumours were also circulating that the Tory party government would circumvent the democratic process, by removing Theresa May as prime minister, and replace her with an interim prime minister. The government might attempt this in order to hold onto power and in control of the Brexit process, as Parliament’s sovereignty attempts to usurp the government’s executive’s powers.

After IHS Markit published extremely disappointing PMIs for the German and wider Eurozone economies on Friday March 22nd, analysts polled by Reuters, were anticipating the latest IFO readings for Germany, to reveal little change. The IFO numbers published at 9:00am beat the forecasts, by some distance. All three; business climate, expectations and current assessment, revealed high levels of general business optimism for Germany in March. The readings may have helped the DAX to recover ground in the morning session; the leading German index traded down -0.15% at 9:40am.

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