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Markets running for cover


Warren Head - The interlocking nature of financial markets showed its dark side over the long Kiwi holiday weekend. While New Zealanders ducked between the showers, the American markets were ducking for cover.



The trigger point for serous setbacks are often obscure and seemingly irrelevant events that can coalesces to flick the switch.

The sharp falls over a couple of days either side of the NZ weekend appear to have been given a nudge by the US White House deciding to bash the Mexicans with their favourite blunt instrument, a.k.a. a tariff.

On the face of it the actual tariff – 5% on Mexican exports – wasn’t much in the context of what has already been imposed on Chinese trade.

But each time there has been additional stress in foreign trade relations the US bond market has weakened.

Enter centre-stage a relatively obscure technical effect on the yield curve of the gilt-edged bond market, the yield-curve inversion – when long-term rates fall below short-term rates.

The yield on the benchmark 10-year Treasury note fell below 2.07% on the first day of trading for the month.

Anyone with the barest of knowledge about financial markets knows about yield curves and what influence they can exercise over an economy – ask the Japanese where their economic miracle went.

We awoke this morning to open a note from First NZ Capital, noting that U.S. stocks were pressured on Monday as tariff fears dragged a key bond yield benchmark to its lowest level in about 20 months, deepening a so-called yield-curve inversion that has accurately predicted economic recessions in the past.

Already, however, investment bank economists are debating whether the yield-curve has the same potency it had back in 2007-08.

“The soft tone also accompanied weak readings on U.S. manufacturing activity,” commented FNZC.

 Last night the Dow Jones Industrial Average fell 33 points, or 0.1%, to 24,781 and the S&P 500 index slid 10 points, or 0.4%, to 2,741.

The Nasdaq Composite Index dropped 99 points, or 1.3%, to 7,353.

It didn’t sound anywhere as bad as Saturday when the Dow Jones Industrial Average dropped 354.84 points, or 1.4%, to 24,815.04, the S&P 500 index fell 36.80 points, or 1.3%, to 2,752.06 and the Nasdaq Composite dropped 114.57 points, or 1.5%, to 7,453.15.

However, FNZC added that the tech-centric index is on track to close in correction territory, often defined as a benchmark closing 10% below its recent peak, which for the Nasdaq occurred on May 3 when it closed at 8,164.

By mid-morning the NZ sharemarket had started a sell-off.

By nightfall it has wiped 166.06 points off the NZX50, which has dropped 1.64% to 9951.93.

Just two weeks ago the market was still setting records above 10,000.

The NZ market has been nothing if not resilient since the market correction in the 4th quarter of 2018. This year has been a bonanza of a year for sharemarket investors, and some of the leaders have flow to over-valued levels. Over the course of this week we shall hopefully see that resilience come to bear - but for now the NZ market is being dragged by the US financial markets.


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