Deflating hopes of a swift resolution to the Sino-US trade war knocked world stocks off a three-week high yesterday, while recession warning lights in United States bond markets weighed on the dollar.
Optimism over a rapprochement between US President Donald Trump and China’s Xi Jinping at the weekend G20 meeting was replaced by scepticism and left Wall Street braced for another day in the red.
Adding to market jitters was an inversion of the short end of the US yield curve in bond markets, which historically has signalled a US recession.
Asian markets had seen Japan’s Nikkei close 2.4 per cent lower after a jump in yen. Europe fared a little better, but London Frankfurt DAX and Paris were all 0.4 to 0.6 per cent lower.
“The initial relief rally was never going to last. Investors need more detail now in order for that risk-on sentiment to survive,” said Jasper Lawler, head of research at London Capital Group.
“So far that detail has not been coming through, and investors have more questions than answers.”
There was added confusion over when the 90-day period, during which the US and China would hold off on imposing more tariffs, would start.
A White House official had said it started on December 1, while earlier, White House economic adviser Larry Kudlow told reporters it would start onJanuary 1.
Moreover, none of the commitments that US officials said had been given by China – including reducing its 40 per cent tariffs on autos – were agreed to in writing and specifics had yet to be hammered out.
Meanwhile, the US yield curve focused investors’ minds. The curve between US three-year and five-year and between two-year and five-year debt inverted on Monday – the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt.
Analysts expect the two-year, 10-year yield curve – seen as a predictor of a US recession – to follow suit.
Yesterday, the yield on benchmark 10-year Treasury notes was at 2.95 per cent compared with its US Monday close of 2.99 per cent. And the spread between 10-year and two-year Treasury yields tightened to around 13 basis points.
Meanwhile, oil prices also extended gains, adding another 2 per cent to Monday’s 4 per cent surge, as investors bet a key Opec meeting tomorrow would deliver supply cuts.
Benchmark Brent crude oil jumped by $1.89 to a high of $63.58 before easing back to trade around $63 at the mid-session. US light crude was up $1 at $53.95 after earlier gaining more than 3 per cent to an intraday high of $54.55.