Global investors and analysts remain worried about the outlook for global markets. While the US-China trade war, and President Trump’s arguments with European countries dominate headlines, there is a growing fear that economic growth might be weaker than it seems.
The US economy seems to be doing well and with inflation on the rise, the Fed is expected to raise its key rate twice over the rest of this year.
But a closely watched indicator of underlying economic health – the so-called shape of the yield curve on US bond yields (from six months out to 30 years duration) hit a worrying 11 year low on Friday and renewed fears of a slow down.
The difference between two-year and 10-year Treasury yields dropped further last week, hitting its lowest level since August 2007.
The Financial times explained that this difference “is an important signal for investors of when the Federal Reserve may curtail its policy tightening and is also seen as a warning of a coming recession if it turns negative, which last happened in 2006.”
That gap fell to as little as 24.322 basis points (bps) on Friday (0.24322%) — the first time below 25 bps since August 9, 2007 — before recovering to 25.504.
Analysts say that the rising chance of more rate rises from the Fed is the major influence at the moment, but there is now a belief the chances of an economic slowdown in the US have risen.
The yield on the benchmark 10-year US Treasury was down 2.6 basis points at 2.8271% on Friday while that on the two-year was off 1.2 bps at 2.582%.
The dollar gave up early gains, with the Dollar index down 0.1% at 94.722 on the day, but up 0.7% for the week.
Wall Street looked at this, but didn’t worry as it the week on a positive note, led by consumer and oil stocks on Friday (but not financials as unconvincing quarterly reports from Citi, JP Morgan and Wells Fargo saw their shares slide).
It capped off a positive week for the stock market, save for Wednesday’s session, when an escalation in the trade war between the US and China knocked investors about, and the price of Brent crude sank almost 7% as Libya’s state oil company said temporarily reduced supply would be returning to market.
The Dow rose 88 points, or 0.4%, to 25,013, the S&P 500 index gained just 1 point to 2,800, while Nasdaq came off of earlier highs to shed 3 points to 7,820 points.
For the week, the Dow was up 2.3%, the S&P added 1.5%, and the Nasdaq finished 1.8% higher. It was the second straight weekly advance for all three, as well as the Dow’s best week since early June.
Among the popular, big tech stocks, Amazon, Alphabet, Facebook and Microsoft also closed at record highs.
They remain the drivers and starting with Netflix next Tuesday and Microsoft later in the week, that enthusiasm will be tested by June quarterly financial results.
