Summary:

  • US benchmarks set to start deep in the red

  • Markets reversing the moves seen on the Tariff news

  • 2-10 Yield curve inverts for the 1st time in almost 15 years

The joyous reaction in the markets to the news that the US would delay increasing tariffs on some Chinese consumer products appears to have been short-lived with US stock benchmarks called to open sharply lower and the S&P500 back below the 2900 handle. The timing of the news seemed odd and the decision appears to have been made after giving a sizable consideration to US consumers in an attempt to mitigate the adverse impact that the tariffs would have caused. In reality it seems more like a sign of weakness from the US and China will surely now be even further emboldened to drive a harder bargain going forwards. 

US indices are all firmly lower ahead of the Wall Street open with the Nasdaq the worst hit and at the time of writing called to open lower by more than 1.5%.

US stock futures are actually lagging several other markets in reversing the initial moves with the German Dax already back below where it trade before the news dropped. Looking at other asset classes can also provide some insight for indices traders with the TNOTE and USDJPY also both showing reversals. The TNOTE in particular is worth further mention as the yield on the US 10-year has moved below that of the US 2-year - known as a yield curve inversion. This part of the curve last inverted in December 2005 and is widely recognised as a harbinger of economic recessions. However, it is worth pointing out that there’s often a lag between this signal and a peak in the US stock market, as can be seen from looking at the last 10 occurrences. 

Of the last 10 yield inversions (2-10s) going back over 60 years, US stocks topped out within 3 months on 6 occasions, but on the other 4 it took 11-22 months for the market to peak.

Judging by history then this sign may not be quite as ominous as it seems and there are several plausible scenarios whereby further gains in stocks in the coming months could easily be conceived IE Delay to additional tariffs, 50 bps cut from the Fed etc. However, more pressingly for the here and now the markets have failed to build on the gains seen after the tariff news broke and are now vulnerable and coming back under pressure. Weekly lows around 2866 could now be seen as key support and if the market moves back below them then 2823 and 2775 could be retested in short order. On the upside bulls would really want a break above 2940 to suggest that there’s more gains to come with 2961 the next level to look to above there.

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