Stocks fall as declining U.S. yields, trade woes knock sentiment

Lloyd Doyle
December 5, 2018

MSCI's broadest index of Asia-Pacific shares outside Japan edged down 0.2 percent as the Australian market gave up 0.5 percent and Seoul's Kospi fell 0.6 percent.

USA crude was 0.5 percent higher at $53.23 per barrel. It had earlier fallen more than 1 percent.

Australian stocks lost 1.3 per cent after Australia's third quarter growth data fell short of expectations.

Japan's Nikkei stock index was 0.3 percent lower.

Overnight, the Dow Jones Industrial Average closed 1.13 percent higher, the S&P 500 gained 1.09 percent and the Nasdaq Composite added 1.51 percent.

"The market decline in the USA overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors", Tai Hui, a strategist at J.P. Morgan Asset Management told clients.

Adding to worries over the outlook for the global economy, the yield curve between USA three-year and five-year notes, and between two-year and five-year paper inverted on Monday - the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt.

Early in Asian trade, the yield on benchmark 10-year Treasury notes fell to 2.9661 percent compared with its USA close of 2.991 percent on Monday.

"The market decline in the US overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors, even as the latest ISM manufacturing data is holding up well", wrote Tai Hui, market strategist at J.P. Morgan Asset Management. The 10-year Treasury note yield fell about 6 basis points to 2.498% on Tuesday, its lowest since September 13, while the spread between two- and 10-year notes dropped to 0.14%, the flattest level since June 2007, setting the tone for a possible inversion of spreads in the future.

A flatter curve is seen as an indicator of a slowing economy, with lower longer-dated yields suggesting that the markets see economic weakness ahead.

The yield curve inversion and comments from Fed speakers are causing investors to rethink the potential of a recession or if rate hikes are nearing the top, said Minh Trang, senior FX trader at Silicon Valley Bank in Santa Clara, California. There have also been false positives in the past, where the yield curve has inverted but no recession has followed, such as in 1966.

"There is also Brexit to keep an eye on, and this is a factor in the ongoing risk aversion". British Prime Minister Theresa May suffered embarrassing defeats one Tuesday, the start of five days of parliamentary debate over her plans to leave the European Union.

Recessionary pressures could be exacerbated if fears surrounding the US-China trade war are resumed following a 90-day truce, agreed at the G20 in Argentina last week.

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. But even before the trading day ended, major US indexes pulled back from intraday highs as investors pondered unresolved issues between the two countries.

The dollar has been undermined by the bond market moves and recession fears, but it has recovered from two-week lows against a basket of currencies to trade around 97, also flat on the day.

The pound was little changed at $1.2717 having touched a 17-month low of $1.2659, rattled by Brexit setbacks in parliament.

The greenback fell against the safe-haven yen, losing 0.75 per cent overnight before stabilising at 112.86 yen.

Oil prices fell, weighed down by swelling US inventories and concerns that slowing economic activity will sap demand for commodities.

U.S. crude futures were down 0.8 per cent at $52.82 per barrel.

Other reports by Iphone Fresh

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