Macro
(New York)
The flattening yield curve is an indicator of a recession and bear market to come. The last six US recessions have all been preceded by an inverted yield curve. Now it is happening again. The gap between two- and ten-year Treasuries was just 34 basis points last week, the lowest since 2007, or the eve of the worst American recession in almost 80 years. A few factors seem to be guiding the flattening. The first is the Fed’s bullish outlook on the economy and hawkishness on rates. The others are very weak inflation expectations over the long term as well as large demand for even modest long end yields, both of which have combined to keep ten-years pinned for some time now.
FINSUM: Yes a flattening yield curve is a bad sign, but remember that it takes, on average, several months (i.e. ~18 months) from when the yield curve inverts to when the economy actually goes into recession, with stocks historically continuing to rise along the way.
(Washington)
The Chinese stock market is now in a bear market and there is a great deal of pressure on its currency. Last time there was this much pressure, in 2015, the market broke, with stocks plunging and the yuan devaluing by 7% over the year. US stocks even plunged in fear. Now, the situation looks like it might occur again, causing some to call the yuan the next “big short”. The currency is already down almost 1% since Friday, and is in negative territory for the year. A burgeoning trade war with the US is adding pressure.
FINSUM: So the one big support for the yuan is the current strength of the Chinese housing market, which has been strong recently (a big contrast to 2015). That seems like it will keep a blow out from happening.
(New York)
Investors beware, the strongest predictor of recession has just rung its bell. An inverted yield curve has predicted all six of the US recessions going back 60 years. And while all of investors’ focus has been on whether the Treasury yield curve will invert, the global yield curve already has. The yield on the ICE Bank of America index of government bonds due in 7 to 10 years has already inverted, with such yields being lower than for 1 to 3 year bonds. While the US economy is currently looking strong, there is growing weakness in Europe, China, and emerging markets, which seems to have inverted the curve. The IMF says the clouds over the world’s economy are “getting darker by the day”.
FINSUM: It is seeming more and more like we will have a global recession. Though, the US seems like it will be the last to succumb to it. One thing to remember—in the US it takes an average of 18.5 months from when the curve inverts to when we reach the peak of the growth cycle.
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(Beijing)
With the US-led tariffs battle in full swing, Americans tend to focus on how such tariffs are affecting our own country. However, to understand how things may play out, we need to see what is happening on the other side. While US markets have taken a shallow hit from the potential trade war, Chinese shares are plummeting, and a very near to a bear market. Both the country’s Shanghai and Shenzhen indexes are at almost a 19% loss from their peak in January, just a hair off the 20% loss that qualifies as a bear market. According to one Chinese securities analyst, “It’s mainly the trade war that has created such panic in the market because the latest developments have surpassed the expectations of many people in China”.
FINSUM: We wonder how much this kind of market pressure will compel the Chinese government to give in to some of the US’ demands? The counter point to that view is that since the country is not a democracy, the government doesn’t really have to worry all that much if people are upset. That is a very blunt view of the situation, but one we think is fundamentally true.
(Washington)
Despite lots of hopes that a US-led trade war would never come to pass, it is now happening. The US has just imposed $50 bn worth of tariffs on China, which is an escalation of previous metal tariffs, and appears to be a major step towards starting a global trade war. With that in mind, how can one protect their portfolio? While almost all sectors are affected by a trade war, the worst ones will be industrials, autos, and meat producers. Auto companies are likely to be hit very hard by tariffs, so it is best to stay away.
FINSUM: The other thing the market does not seem to be taking into account is that tariffs seem likely to increase US inflation, as companies tend to pass along the increase cost of production onto consumers. That could be an additional downside risk, but one potentially offset by the chance of recession.
(New York)
It was a golden period, but it seems it only lasted less than a year. 2017 was a great year for the global economy. For the first time since the Crisis, the whole world seemed to be growing in unison. Even Europe, long in the doldrums after its sovereign debt crisis, had blossomed. But just as that growth was finally harmonizing, it is changing again. US growth still looks solid, but the rest of the world, especially Europe, is beginning to stagnate. China, too, leaks weaker, and both the ECB and Chinese central bank have held off on any rate rises.
FINSUM: We wonder if a global recession is coming. The US still looks strong, but then again we are coming off a very strong late stage tax cut.