Stocks fall as declining US yields, trade woes knock sentiment

US dollar falls on economic growth fears

Jeffrey Gundlach, chief executive officer of DoubleLine Capital, says the U.S. Treasury yield curve inversion on short end maturities are signaling that the "economy is poised to weaken".

Stuart Canning, research analyst at M&G Investments, has said the temporary yield curve inversion which saw three-year Treasury yields lower than two-year notes is a signal that interest rates in the U.S. may need to come down in the near-term.

The dollar was 0.65 percent lower against the Japanese yen, which tends to benefit during geopolitical or financial stress as Japan is the world's biggest creditor nation.

Should this harbinger of bad news hold, the USA economy is nearly certainly looking at a slowdown if not an outright recession.

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.

On Wednesday, Federal Reserve Chairman Jerome Powell said USA rates were nearing neutral levels, which markets interpreted as signaling a slowdown in rate hikes.

In separate remarks on early December 3, Fed vice chair Randal Quarles said the central bank, while "data dependent", was following a strategy that would not be thrown off course by "every wavering" of economic statistics.

A precarious situation for the Fed undoubtedly and one that I believe they will be forced to respond to with either an outright suspension of rate hikes for the next six months - potentially skipping the expected rate hike this meeting as well - or with a rate hike accompanied by very strongly worded assertions that the Fed will not raise rates again for an extended period of time and that rate hikes may themselves be in store in the very near future. "We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction". US financial shares, which are particularly sensitive to bond market swings, dropped 4.4 percent.

Trump asks OPEC not to cut production
Traders said oil prices were being weighed down by weak global financial markets, which saw stock markets tumble on Thursday. OPEC is also riven by internal conflict, particularly the rivalry between Saudi Arabia and Iran.

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

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.

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. A separate spread between 3-month and 10-year Treasury securities, considered by some as a better recession predictor, was also falling, though at just around 0.5 percentage point it remained comfortably in positive territory.

Cornerstone Macro analyst Roberto Perli attributed the drop in 10-year yields to "two main culprits..."

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

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

"The inversion...clearly implies that there is not an insignificant chance the Fed will have to ease in the next few years".

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