Published: Fri, December 07, 2018
Money | By Ralph Mccoy

Stocks drop as falling U.S. yields, trade worries hit mood

Stocks drop as falling U.S. yields, trade worries hit mood

The more closely watched part of the curve-the gap between two-year and 10-year yields-remains upwardly sloped.

Asian stocks slid on Wednesday, dragged down by Wall Street's tumble as sharp declines in long-term U.S. Treasury yields and resurgent trade concerns stoked investor worries about global economic growth.

In the Treasury market, all eyes remain on the yield curve after three-year yields climbed above those of their five-year peers on Monday, potentially foreshadowing the end of the Fed's tightening campaign.

Brent crude oil settled at $62.08 per barrel, or jumped up 0.63 percent.

Bob Michele, who heads global fixed income for JP Morgan's investment arm, said he doesn't expect the US yield curve to invert, but he was watching it closely. On Monday of this week, the US government's five-year bond yielded less interest than the three-year bond.

Tuesday's markets chaos came a day after equities boomed on optimism that China and the US had temporarily called a tariff ceasefire to sort out their trade dispute.

The moves follow similar declines in USA bank shares, which dropped 4.4 per cent on Tuesday.

Germany's 10-year bond yield fell to its lowest in four and a half months at 0.265 percent and was last down 4 bps on the day. It had earlier fallen more than 1 percent. Investors are still expecting the Fed to raise rates by 0.25% in December, despite interpretations that comments from Chairman Jerome Powell signal a more dovish stance. It has spread to the eurozone, where the German 2-10 yield curve is at its flattest since mid-2017 at 85.70 basis points.

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In an "economic letter" published by the San Francisco office of the U.S. Federal Reserve (Fed), Michael D. Bauer and Thomas M. Mertens summarize the implications of an inversion succinctly: "Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve. That said, it is true that the economic outlook is murkier than before", said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

British Prime Minister Theresa May suffered embarrassing defeats on Tuesday at the start of five days of debate over her plans to leave the European Union that could determine the future of Brexit and the fate of her government.

Trump threatened on Tuesday to place "major tariffs" on Chinese goods imported into the United States if his administration is unable to reach an effective trade deal with Beijing.

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.

Failure would raise the spectre of fresh USA tariff action and potential Chinese retaliation as early as March.

The US dollar bought 112.81 Japanese yen, lower than 113.68 Japanese yen of the previous session.

Against a basket of six rivals .DXY , the dollar edged up 0.1 percent to 97.103, trimming this week's losses to 0.2 percent.

The recent weakness in the dollar comes against the backdrop of a temporary truce in the U.S.

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