Even for the most bullish, Friday's action has got to be a big worry .....

ref :- General

It's all been going on, and not much of it offers any encouragement to those bulls maintaining the faith in economies and markets. The resilience of investors has been remarkable .... for example, by Thursday night the S&P 500 had recouped about 70% of the falls suffered at the end of last year despite all the worries about a slowing economic picture (particularly globally), trade conflict, Brexit, inverting yield curves .... you name it. Friday was a big day however, and not in good way ..... and we'll have to wait and see if that resilience can withstand the growing number of signals that would seem to point the other way.

So what happened on Friday ? Very briefly. .... and not at all comprehensively .... some pretty rank manufacturing data emerged out of Germany and France, which in particular seemed to confirm that Europe's strongest economic nation was struggling with the effects of trade conflict and that growth in the Eurozone as a whole was close to stagnating. Unsurprisingly the Euro was marked down but more importantly yields on the benchmark 10yr German bund fell sharply through zero (to a low of -0.04).

The poor numbers out of Europe played perfectly into the narrative that stumbling global growth will adversely affect the US economy, and yields on US Treasuries also fell sharply : the 10yr Treasury yield fell as low as 2.42% (it traded as high as 2.63% as recently as Tuesday). The real significance of that is that we saw yield curve inversion in a measure that many decent judges like to follow. As you know, yield curve inversion (when shorter-term yields are higher than longer ones) is a strong (though not foolproof) pointer to an oncoming recession. The most commonly watched yield spread is that between 2yr and 10yr Treasuries , and by that measure the 10yr is clinging on to a premium of about 13 basis points. But some believe that a better indicator of short rates compared to long ones is the 3 month / 10yr spread .... and on Friday the 10yr yield fell below the 3-month rate.

That was enough to undermine stock prices, which fell about 2%. Whether this particular yield curve inversion and its possible recessionary implications presage a much larger correction in equities is unclear, but it does add to the debate about the future for interest rates. At the end of 2018, the Fed was still indicating that a further two rate rises were probable this year. The rhetoric has turned more cautious since, but it was only on Wednesday that the latest dot-plot revealed that a majority of those on the policy-making committee see rates staying unchanged (2.25 - 2.50%) throughout 2019. This yield curve inversion strengthens the argument that the Fed needs to go further, and rather than contemplate any rate hikes as they had been doing so recently, the Fed should, in fact, EASE rates this year. Fed officials haven't bought into that idea publicly (yet), but the money markets seem to believe that they'll have to embrace the idea .... Fed Funds futures are trading at levels that suggest one rate cut in 2019 is highly likely.

Those calling for a major and lasting reversal in share prices have been wrong many times in this bull market, and it may be the case that the prospect of an easier monetary policy setting from the Fed is enough to sustain the optimism of investors. But whether you inherently believe in the predictive abilities of yield curve inversion or not, you have to recognize that many players are convinced of its value, and these things can be self-fulfilling. So it would be a good idea to keep a close eye on that 2yr / 10yr spread , and probably wise for investors to tread a little carefully too.

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