There are many arguments on either side over the implications of the Treasury yield curve becoming inverted. Some say it is different this time (massive short term debt issuance being cited), others just look at the historical tendency for an inversion to consistently proceed a recession by 12 to 18 months. Hints of the curve becoming inverted (between 2s and 5s) have spooked markets, with a massive correction on Wall Street resulting, as volatility spikes higher and equity markets fearful. With the Fed increasingly cautious, and significant question marks over the US/China 90 day truce on tariffs, growth expectations are suffering. Add in continued falling inflation expectations, this is a hit to the longer end of the curve and another reason to suggest the longer term outperformance of the dollar is on the wane. Donald Trump has felt compelled to tweet about his intentions to get a deal done with China and this has helped to settle selling pressure on the futures markets. However, although there has been a mild dollar rebound this morning, several major markets are turning against the greenback. Gold pushing above $1236 was a key move, Dollar/Yen signs of negativity and EUR/USD threatening an upside break, with yield differentials all moving against the dollar. US markets will close today in mourn the passing of ex-President Bush.
Wall Street close hugely lower, with the Dow losing almost 800 ticks (-3.1%), whilst the S&P 500 was -3.2% at 2701. Wall Street futures have rebounded a shade +0.3% and this has helped to steady Asian markets to an extent (Nikkei -0.5%, Shanghai Composite -0.6%) with European markets showing similar losses (FTSE 100 futures -1.0%). In forex, there has been a degree of dollar recovery this morning. Sterling continues to be an underperformer, whilst the Aussie is under pressure after weaker than expected Australian growth. In commodities, the dollar rebound has taken some of the shine off the breakout on gold, whilst oil is also back lower again on the concerns for growth.
The services PMIs dominate the economic calendar for traders today. The Eurozone final Services PMI for November is at 0900GMT which is expected to be confirmed at 53.1 (prelim Nov was 53.1, but this is down from the final October reading of 53.7). Furthermore, final Eurozone Composite PMI is expected to come in at 52.4 (down from 53.1 in October). The UK Services PMI at 0930GMT is expected to show a slight improvement to 52.5 (from 52.2 in October), whilst it is also worth noting that the US ISM Manufacturing PMI is to be delayed until tomorrow. Canadian traders will also be on the lookout for the Bank of Canada monetary policy decision at 1500GMT. Consensus expects the BoC to go on hold this month after the hike to +1.75% last month. The Fed’s Beige Book will be watched at 1900GMT for the Fed’s assessment of the economic outlook.
Chart of the Day – NZD/USD
The uptrend channel on the Kiwi has really taken off in the past week. We spoke recently about the strength of the recovery when the unwinding move bounced off a key medium term breakout support around $0.6700/$0.6720 and then a higher low at $0.6750. The breakout this week above $0.6850 which is a key pivot from the summer of 2018, now becomes a key basis of support for a next higher low. The momentum indicators are strongly configured, but the RSI is stretched again around