This Market Indicator That Frequently Signals a Recession Just Flashed Red

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

The dollar, which started the week on a weak footing as the apparent thaw in trade tensions between the USA and China cooled demand for the safe-haven currency, extended its fall as investors anxious about the inversion of the short end of the US yield curve in bond markets.

Asian stocks fell on Wednesday, dragged by Wall Street's tumble as sharp declines in long-term US Treasury yields and resurgent trade concerns stoked investor worries about global economic growth.

That pushed MSCI's all-country index down nearly half a per cent. The euro was 0.11 percent lower.

Japan's Nikkei dropped 0.8 percent and South Korea's KOSPI shed 0.5 percent. Earlier, White House economic adviser Larry Kudlow told reporters it would start on January 1. The mood further soured after data showed Australia's third-quarter growth fell short of expectations.

But European losses were trimmed as the session continued, with a pan-European index down 0.75 percent by 1145 GMT compared with falls of over one percent earlier. On Tuesday, the Dow Jones Industrial Average fell almost 800 points, or 3.1%, largely in response to recession fears stoked by recent changes in the yield curve.

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

The dollar edged lower on Tuesday as U.S. Treasury yields fell, feeding fears that the Federal Reserve could pause in its rate-hike cycle, while an inversion in part of the yield curve was taken as a red flag for a potential recession. The 10-year Treasury note yield fell about 6 basis points to 2.498% Tuesday, its lowest since September 13, while the spread between 2-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.

On Monday, 2- and 5-year Treasury yields inverted, meaning the shorter dated 2-year money became more expensive than the later maturing 5-year.

"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.

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

An inversion of this part of the yield curve has preceded each of the last nine recessions dating back to 1955. There have also been false positives in the past, where the yield curve has inverted but no recession has followed, such as in 1966. "That said, it is true that the economic outlook is murkier than before", said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Risk markets were also weighed down as optimism faded over a truce made over the weekend between US President Donald Trump and Chinese President Xi Jinping. -China trade war gave way to doubts on whether the two countries are able to resolve their differences before a 90-day deadline. This is seen as a portent of a USA recession.

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

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.

It rose 0.2 per cent to 113 yen after losing 0.75 per cent the previous day against the safe-haven Japanese currency.

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

Brent crude oil settled at $62.08 per barrel, or jumped up 0.63 percent.

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