Yield Curve Inversion & Dow Transport Index Point To Problems Ahead

Dow futures point higher but gains could be limited

An inversion of the 2 year and 10-year bond yield curves in the previous session sent panic across the markets. The DOW closed down 800 points, below its 200-day moving average as investors sold out of riskier assets, such as stocks, and moved into safer havens such as bonds, gold and the Japanese yen. 

The inversion of the 2-year yield curve with the 10 year yield curve provoked such a reaction because it is considered a clear signal for a recession. These yield curve’s inverted before each of the 7 previous recessions, including the Great Recession.

Whilst an inverted yield curve preceded each recession, every inverted yield curve does not lead to a recession. In the same breath, US – Sino trade tensions, Brexit, Italian politics and political unrest in Hong Kong are giving investors plenty to fret about.

Fears have eased in early trading this morning; investors are bargain hunting after yesterday’s bloodbath and Dow futures are nudging higher recouping some losses. Yet without any good news to support the move higher, today’s rally could be more of a dead cat bounce rather than any meaningful advance owing to a change in risk sentiment.

Dow Transportation Index Points To More Pain To Come
The fact is that no one actually knows what is next for the markets. However, the signs flashing from the markets are not great. Far from it.  In addition to the inverted 2 year and 10 year yield curve, the Dow transport index which is often viewed as a lead indicator for wider stock market movements is also showing signs of strain. The DJT is currently down 11.5% from its April high, whilst the Dow is down just 6.8%.

Up Next
US retail sales data is up next. Expectations are for retail sales to have increased a steady 0.3% month on month. Given current slowdown fears and surprise to the downside could result in US futures quickly giving up this morning’s gains.


Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.