As recession warnings flashed from the bond market, Wall Street plummeted lower overnight. The Dow closed down 800 points whilst the Nasdaq and the S&P tumbled 3% and 2.9% respectively. Asian markets followed US equity indices lower.

An inversion of the 2-year treasury yield with the 10 year yield for the first time since 2007 injected fear across the financial markets. The yield curve inversion is considered to be a warning shot for a recession. Investors are nervous because the inversion of these yield curves has accurately predicted each of the previous 7 recessions, including the Great Recession. Investors responded by dumping riskier assets, such as equities, instead moving their money into safer havens such as the Japanese yen and gold. Oil also fell sharply. European and US futures are pointing to a mixed start on the opening bell on Thursday.

It is important to note that whilst an inverted yield preceded every recession, not every yield curve inversion leads to a recession. That said given the US – Sino trade dispute, Brexit, political unrest in Hong Kong and political instability in Italy, investors have plenty to worry about.

If a recession is coming it could still be a good 18 months away This makes President Trump’s tweet attacking the Federal Reserve as stocks tanked more understandable. Of course, Trump wants lower rates, a recession around the time of the US Presidential elections is a sure way to lose the race.

 

Will US retail sales restore confidence?

The dollar closed the previous session higher thanks to its safe haven appeal, despite Trump’s attack on the Fed. Attention will fall to US retail sales this afternoon for further clues over the health of the US economy. Expectations are for a steady 0.3% growth in retail sales month on month in July. A stronger reading could help repair frayed nerves boosting the dollar and the US stock indices. However given the heightened fears of recession, a weak reading could spark another sell off.

 

Pound traders to shrug off retail sales as well?

Pound traders will also be looking towards UK retail sales data. Expectations are for a -0.2% decline month on month in July, down from 0.9% previously. The data comes after figures earlier in the week showed that UK wages grew at the fastest pace in 11 year and after inflation unexpectedly pushed back above the BoE’s 2% target. Yet despite these encouraging readings the pound continues to hover around $1.2050. Clearly Brexit is all that really matters to pound traders right now. With this in mind a stronger than forecast reading could see a limited reaction.

This information has been prepared by London Capital Group Ltd (LCG). The material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. LCG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.

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