Markets volatile as growth concerns return

  • Markets
  • Tuesday, 04 Feb 2020

Similar signals were flashed in January and October 2018, just before furious market corrections took place, according to Inter-Pacific Securities head of research Pong Teng Siew(pic). Some prefer to stay cool and watch first.

Following the last inversion of the US Treasury yield curve, long term Treasury yields have again dipped below those of a shorter duration, triggering alarm bells.

Growth concerns have re-surfaced while historically, yield curve inversions had accurately predicted recessions.This time, investors flocked to 10-year bonds, driving down yields, as coronavirus fears and data indicating a slowdown of the US economy, re-ignited concerns over the risk of recession.

The yield curve soon uninverted after flashing red last Tuesday, but its roller coaster movements indicate unstable market conditions.

The Hindenburg Omen, a technical indicator signalling a higher chance of a stockmarket crash, had flashed on the S&P 500 following the steep sell-off on US markets last Monday.

Data from Sundial Capital Research dating back to 1970 showed negative returns for the S&P one to two weeks, and one to three months following this indicator being tripped.

Similar signals were flashed in January and October 2018, just before furious market corrections took place, according to Inter-Pacific Securities head of research Pong Teng Siew. Some prefer to stay cool and watch first.

In this case, markets had been overbought and it was time to consolidate. It may not be any “new pessimism” over the US economy that caused the yield curve to invert but the impact of the epidemic which is a wild card at the moment.

In August 2019, the yield curve had inverted, and uninverted only in November 2019 as yields on 10-year bonds rose.

Inverted yield curves often uninvert just before a downturn but last year’s occurrence was said to be different as massive stimulus bond purchases could have distorted interest rates.

Rates are still low and the effects of inflation have yet to be felt in the advanced countries; towards the end of 2019, predictions of the onset of recession were pushed back as the US labour market and consumer spending remained strong.

Still, the warning that yield curve inversion could recur in 2020 has come about as further signs of slowdown emerged in the US economy.

US job openings in November have fallen the most in more than four years, said a fourth quarter business conditions survey by the National Association for Business Economics, suggesting that the US labour market has likely peaked.

US pending home sales dropped 4.9% in December, the worst month-to-month fall in more than nine years, according to the National Association of Realtors’ index for pending home sales on signed contracts to buy existing homes.

Consumer spending and incomes last year rose the slowest in three years; spending is expected to slow down further this year as wage growth has levelled off

Low interest rates should still hold up US consumer spending, a bulwark of the economy.However, the temporary halt to production of the Boeing 737 Max, may knock off some growth.

According to US Treasury Secretary Steven Mnuchin, growth originally expected at 2.5% to 3%, may be closer to 2.5% due to the adjustment from Boeing numbers.

Should growth in the first quarter slow sharply, there is speculation that the US Federal Reserve may embark on another bond buying programme upon the cessation of the current one which may start tapering in April.Following the spike in money market rates last September, the Fed had embarked on Treasury purchases of US$60bil per month to add liquidity to the system.

Caterpillar, a bellwether for the global economy, warned that earnings this year will fall below expectations.

Investors are getting jittery, said Malaysian Rating Corp associate director, economic research division, Nor Zahidi Alias, pointing to the knock on the Chinese economy from the epidemic and the possibility that future US-China trade deals may not lift China’s export sector

China’s first quarter growth may dip to 5% or lower, Chinese Academy of Social Sciences economist Zhang Ming was quoted as saying by Caijing magazine.

Assuming that this outbreak may peak in early to mid-February, the impact could be more severe that of the Severe Acute Respiratory Syndrome, as more focus is now placed on services and consumption

This outbreak may be a temporary dent on the global economy, especially China, which was attempting to stabilise especially following the hit from US tariffs.

As the Fed had responded to growth concerns last year via the cutting of rates by 75 basis points, bets are on that they will cut twice instead of once this year.

Three rounds of rate cuts are sufficient to cushion the slowing US economy which is supported by solid employment and consumer spending, said Socio Economic Research Center executive director Lee Heng Guie.

All are watching how this scenario of slowdown is going to play out.

Columnist Yap Leng Kuen notes that the virus has shaken markets.

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