Friday, 13 July 2018

Markets rise, yield curve not signalling bear market yet

Markets rebounded on Thursday after falling on Wednesday.

In the US, the S&P 500 rose 0.9 percent while the Nasdaq Composite rose 1.4 percent to hit a new record.

Elsewhere, the STOXX Europe 600 rose 0.8 percent while the Shanghai Composite surged 2.1 percent.

“While equity markets in the U.S. and Europe followed Asian markets lower yesterday in response to Trump’s proposals for additional tariffs, investors appear today to have adopted a much more positive stance about the prospects for an eventual resolution of the conflict,” said analysts at Daiwa Capital Markets in a note.

“We’re seeing technology pick up, and other areas more broadly as well, as fundamentals remain very good,” said Ralph Bassett, head of small and mid-cap equities at Aberdeen Standard Investments.

Meanwhile, strategists at Morgan Stanley on Thursday predicted that the yield curve will invert by the middle of 2019.

While a inverted yield curve is supposed to signal a recession, Larry Light at Forbes said that stocks could still keep climbing after that happens.

“An inverted yield curve is not a sell signal,” he quoted Ryan Detrick, senior market strategist at LPL Financial, as saying. “Recessions aren’t automatically around the corner.”

In any case, Ed Yardeni, president of Yardeni Research, thinks that the yield curve is not a good indicator of a recession and bear market this time.

Yardeni cited work by Federal Reserve economists that suggested that a near-term forward spread may be a better indicator of an imminent recession.

“Unlike far-term yield spreads, the near-term forward spread has not been trending down in recent years, and survey-based measures of longer-term expectations for short term interest rates show no sign of an expected inversion,” the Fed economists wrote.

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