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The fall of the yield curve below zero for the first time since 2007 stirred up the financial markets. The indicator, showing the difference between 10 and 3-year treasuries, is a reliable harbinger of a recession with a time lag of 12-18 months. Its inversion pushed players to active sales of shares. The losses of the S & P 500 amounted to 1.5%, and two new topics appeared on the market, fueling traders' interest in protective assets, such as the yen.
The sharp change in the rate of the Federal Reserve at the beginning of the year contributed to the rapid rally of US stock indices. The stock market prepared to close the quarter with the best result in nearly 30 years. However, it looks unnatural when macroeconomic statistics deteriorate and stocks rise. The growth of the US economy in the first quarter, will slowdown to less than 1% according to estimates of the leading indicator from the Atlanta Fed. hus, Morgan Stanley suspects that October-December GDP may be adjusted from 2.6% to 1.8% in quarterly terms. Divergence between economic reports and stock indicators cannot last forever.
The situation is similar throughout the world. Thus, the index of purchasing managers in the manufacturing sector of China, Japan, and the eurozone is below the critical level - 50, which indicates a slowdown in global GDP growth. Meanwhile, European stocks are ahead of their American counterparts, and the global MSCI is increasing. The naked eye can see that the market is overheated, which means it's time to pay attention to the safe haven assets. A 1.5% increase in the Japanese yen last week is a further evidence of this.
The national currency of Japan was under the "press" for quite some time. Its growth was hindered by such factors as high risk appetite, low rates of the world debt market and volatility. Inversion of the US yield curve provoked carry-traders to close positions, increased demand for funding currencies, and also caused the USDJPY rate to depreciate.
Among the most obvious fears of the market is the excessively "soft" position of the Fed. There was a too sharp change of tone. In December, the regulator allowed three series of rate increases, and now it does not plan any policy tightening. Perhaps, officials of the regulator do not agree on something, for example, a speedy recession. That is why the yield curve and went into the red zone.
Safe haven assets, as well as the yen, will be supported by the growing risks of the subsequent correction of the S & P 500 and increased volatility. The situation is heightened by rumors about Theresa May's resignation and the possible escalation of trade conflicts. Thus, the USDJPY pair may well move to the level of $ 108.5.
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