Winter is not coming – yet


It typically takes a few quarters for the negative impact of a yield curve inversion to hit the equity market
Chief Investment Office05 Dec 2018
Photo credit: AFP Photo


Markets have continued to trade in a highly volatile, non-trending environment. The gains made on Monday (3 December) after the US-China trade war truce were wiped out on Tuesday (4 December), as global investors had second thoughts about the progress made. The backtracking of US President Donald Trump’s announcement that Beijing had agreed to reduce tariffs on US-made cars by top White House economic advisor Larry Kudlow did not help markets.

Fresh worry emerges after trade war and rate hike concerns subside: Headwinds brought about by escalating trade war tensions and Federal Reserve’s rate hikes have been welldocumented and discussed. Given the 90-day truce between the US and China as well as the recent dovish tilt in the Fed’s overall monetary stance, both are temporarily behind us, albeit briefly. One fresh concern is the fear of a US economic slowdown in anticipation of a yield curve inversion. Indeed, the 5- and 3-year yield curve has inverted for the first time since 2007, and the 10- and 2-year yield curve is currently very flat at 0.2%. We do not rule out the possibility of an impending inversion of the 10- and 2-year yield, but it takes time for it to negatively impact the equity market – typically a few quarters.


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