- Limited economic data and trading hours in the week.
- Seasonally low volumes with the S&P / ASX 200 benchmark down 5.6% this year.
- China reopening and US interest rate direction hogs the limelight into the year’s end.
Markets to start the week
Yesterday the front part of the US Treasury yield curve rose. The 4-month was up 0.031%, the latter maturities declined, and the 10-year yield declined 0.013%. This is representative of an inverting yield curve, with higher yields for shorter-dated versus longer-dated maturities.
The stocks most sensitive to market perceptions of future interest rate environments are those growing the fastest. These are primarily technology companies. In the US, the pre-eminent listing for technology companies is the NASDAQ.
Yesterday’s movements in the bond markets resulted in an aggregate loss of 1.4% across the NASDAQ composite index.
Yield curve inversion
An inverted yield curve is a situation in which the yields on short-term government bonds are higher than those on long-term government bonds.
That is unusual because, in a normal market, investors expect to receive higher yields on long-term bonds to compensate for the increased risk of holding them for a more extended period.
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An inverted yield curve can be a negative sign for investors because it often indicates that the market expects economic conditions to deteriorate.
That can be caused by various factors, such as rising inflation expectations or declining confidence in the economy. When investors expect economic conditions to worsen, they may be less likely to make long-term investments, leading to a decline in asset prices and potentially lower returns for investors.
Additionally, an inverted yield curve can also signal that a recession may be on the horizon. In the past, inverted yield curves have often preceded recessions, which can also lead to lower returns for investors as economic conditions deteriorate.
Overall, an inverted yield curve can cause concern for investors as it may indicate that economic conditions are expected to worsen, leading to lower investment returns.
China’s COVID-19 Policy
China’s remarkable U-turn on its zero-COVID policy has shaken markets and has the potential to heap more pain on the Federal Reserve as it attempts to quell inflation.
The pent-up travel demand for Chinese citizens, both domestically and internationally, is likely to draw heavily on oil product inventories and keep already stretched international supply lines taught.
Despite the evident confusion on the ground, the move will be welcomed by those in the country subject to the most stringent restrictions on movement.
Summary
The market is attempting to price in some very big themes for 2022 and beyond into a very short and shallow liquidity window. We can expect that to continue into 2023.
China’s direction on COVID-19 and its subsequent demands on energy will continue to play out against the backdrop of an unstable interest rate environment. The stock market will chalk up the winners and losers.
