Stocks drop as falling United States yields, trade worries hit mood

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If you've heard lately that the "yield curve" is inverting, your response might range from curiosity about what that portends for the USA economy to, perhaps more likely, the kind of drowsiness brought on by arcane financial jargon.

The flattening of the curve gained momentum after last week's signal by the Federal Reserve that it may be nearing an end to its three-year rate-increase cycle.

Global equities have been shaken as a flattening US Treasury yield curve - a result of a steep fall in longer-dated yields - fanned recession jitters and as US-China trade conflict woes resurfaced after a temporary lull. Most of the time, banks demand higher interest for longer periods of time (cuz who knows when they're gonna see that money again?!).

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Asian stocks fell on Wednesday, dragged by Wall Street's tumble as sharp declines in long-term US Treasury yields and resurgent trade concerns stoked investor worries about global economic growth.

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"The US economy is likely to be able to withstand another rate hike or two, therefore the flattening of the Treasury curve looks a little over done". The curve between three-year and five-year notes inverted to a low of negative 1.2 basis points for the first time since 2007.

The greenback rose 0.32 percent against the Japanese yen and the euro gave up all its early gains to trade down 0.04 percent against the dollar.

No, at least not yet.

Failure would raise the spectre of fresh USA tariff action and potential Chinese retaliation as early as March.

"If that is indeed to be the case, the recent strong equity recovery is at risk from fundamental economic deterioration, a message that is sounding from the junk bond market, whose rebound has been far less impressive". It may take two rate hikes or more for that portion of the curve to invert. The Big One will be when 2-year and 10-year Treasury rates swap places, and bond traders are doing their darnedest to make it happen soon, as Robert Burgess points out.

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The Dow Jones Industrial Average fell 799.36 points, or 3.1 percent, to 25,027.07, the S&P 500 lost 90.31 points, or 3.24 percent, to 2,700.06 and the Nasdaq Composite dropped 283.09 points, or 3.8 percent, to 7,158.43.

Of course, that's still "pretty doggone tight", said Randy Frederick, vice president of trading and derivatives at Charles Schwab.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.6 per cent. Investors are still expecting the Fed to raise rates by 0.25% in December, despite interpretations that comments from Chairman Jerome Powell signal a more dovish stance. An inversion between 3-month Treasury bills and 10-year Treasury notes is viewed as a "more appropriate indicator" of a recession.

Even if the more important parts of the yield curve flip to inversion, that doesn't mean a recession will happen the next day. Sometimes, yield curves can become inverted, a scenario in which short-term yields are higher than long-term yields.

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