Yield curve inversion revives concerns over economic slowdown

Asia shares ease as doubts emerge over Sino-US trade war truce

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U.S. President Donald Trump on Tuesday held out the possibility of an extension of the 90-day trade truce with China but warned he would revert to tariffs if the two sides could not resolve their differences.

Analysts expected the two-year, 10-year yield curve to follow suit. Meanwhile, the Fed has pushed short-term interest rates up, bringing them closer to-and now, in some cases, above-longer-term yields. If the trend in the graph below continues, there could be a two-year/10-year yield curve inversion by the end of 2018. The euro was 0.11 percent lower.

"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", Tai Hui, a strategist at J.P. Morgan Asset Management told clients. This is seen as a portent of a USA recession.

Yet investor pessimism over the deal's ability to produce a more concrete and comprehensive resolution of tariff disputes has partly meant that the bond market will keep the spotlight on a US economy that has so far remained resilient to tariffs, but which analysts say could finally buckle to softening global growth next year.

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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.

"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.

According to the San Francisco Fed, each of the nine USA recessions that have occurred since 1955 came between six months and 24 months after a an inversion in the yield curve of two-year and 10-year Treasury yields.

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. Shanghai markets fell 0.6 per cent, their losses limited by Chinese officials expressing confidence that a trade deal would be clinched on time.

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Federal Reserve Chairman Jerome Powell was scheduled to testify on Wednesday to a congressional Joint Economic Committee, but the hearing was postponed because of a national day of mourning for U.S. President George H.W. Bush, who died on Friday. Sometimes, yield curves can become inverted, a scenario in which short-term yields are higher than long-term yields.

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.

The dollar struggled in the wake of falling Treasury yields, with its index against a basket of six major currencies briefly stooping to a near two-week low of 96.379 overnight before edging back above 97.00.

The pound touched 17-month lows of $1.2659 on Tuesday, then recovered to trade around $1.2734 on Wednesday, flat for the day.

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Rouhani last threatened to close the Gulf in July when he warned the U.S. "should not play with the lion's tail". Rouhani said the United States would not succeed in cutting Iran's economic ties with the region and the world.

Oil prices fell, weighed down by swelling USA inventories and concerns that slowing economic activity will sap demand for commodities. Brent futures shed more than one per cent to US$61.4 per barrel.

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