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Yield Curve Inversion and Global Slowdown Hammered Stocks, Not US-China Trade Talks

It was another volatile week with multiple theme working on the markets. US-China trade truce, arrest of Chinese business executive, stock market routs, treasury yield free fall, US yield curve inversion, weak economic data and global slow down, OPEC+ production cut, UK Brexit parliament debate, Italy budget. All have a hand in market volatility.

Commodity currencies ended as the weakest ones. Australia lead the way with surprisingly weak Q3 GDP figure. Canadian Dollar was additionally pressured by BoC and oil, but saved by strong job data. Swiss Franc was the strongest one for the week, followed by Japanese Yen, on risk aversion. Mild weakest in emerging market currency like Turkish Lira gave the Franc a slight upper hand. Euro, Dollar and Sterling were mixed.

Many of the theme have not concluded yet. Markets will be eager to see more progress in the 90-day US-China trade talks. Brexit vote will be held on Tuesday. Italy may or may not submit its revised 2019 budget. ECB will meet on Thursday. Oil could be under pressure again after the production cut. And, yield and stocks are continuous theme.

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Huawei CFO arrest would jeopardize US-China trade talk?

Worries over US-China trade war were blamed by many as the reason for the stock market selloffs. Some criticize that the meeting of Trump and Xi on December ended without concrete progress. More pointed to the arrest of Chinese tech giant Huawei’s CFO in Canada, by the request of the US, as a move that would complicate or even jeopardize the trade negotiations. We do not share the same view.

Let’s reiterate that a 90 days ceasefire period (from Dec 1) is now set for the negotiations. Words from Trump and White House economic advisor Larry Kudlow were affirmative. Trade Representative Robert Lighthizer, the only one in the cabinet who knows how to make a trade agreement, entered the ring to let the talks. China has agreed to buy soybeans immediately and would lower auto tariffs during the trade talks. China has also released plans for strict protection of intellectual property. And even after the arrest of the Huawei executive, no Chinese officials have linked the act with trade negotiations. The developments have been positive.

In the financial markets, China’s Shanghai SSE has indeed closed the week up 0.68%. Hong Kong HSI just lost -1.67%. Remember that in the background, Japan said it will ban the purchase of equipment from both Huawei and ZTE. EU has raised alarm on Huawei’s security risks. UK BT said it will bar Huawei from the core of its 5G networks, and remove it from the core of its 3G and 4G networks. These were pretty bad news for the China and Hong Kong tech sector. But stocks responses were rather limited. Staying in Asia, Singapore Strait Times closed the week down -0.21%. Nikkei, though, was heavier hit and lost -3.01%.

On the other hand, over the week, DOW dropped -4.50%, S&P 500 dropped -4.0%, NASDAQ dropped -4.93%. In Europe, DAX dropped -4.17%., CAC dropped -2.94% and FTSE dropped -2.75%. All three major European indices closed at new 2018 low. So, fear of escalation in US-China trade war prompted selloff in US and European stocks. But Asian stocks were immune? It doesn’t make sense all.

Yield curve inversion and global slowdown

Instead, worries over slowdown in the advanced economy, slump in oil prices and yield curve inversion in the US are seen by us as the main driving force in the markets. November Eurozone PMI composite was finalized at 52.7, lowest since September 2016. In particular, Germany PMI composite hit 47-month low at 52.3. As Markit noted, “it was in Germany where the euro area’s growth slowdown was centred”. The disappointing US non-farm payroll report, which showed only 155k growth, also add to the argument that job market growth momentum has peaked.

Global bond yields suffered persistent decline last week. In Japan, 10 year JGB yield hit as low as 0.43, lowest since July, and compares to October’s peak at 0.166. It closed at 0.063. German 10 year bund yield hit as low as 0.227 before closing at 0.251. That’s the lowest since May’s one-day