Today’s market action is demonstrating a well-known phenomenon in the financial markets called a dead cat bounce. This usually happens after a sharp and steep sell off. The fact is that we have very shaky ground and a bounce like this isn’t going to last because investors are trying to catch the positive yield before it is too late.
The global stock sell-off was triggered because of the spread between the 2-year and 10-year Treasury yield that turned negative due to recession concerns. Of course, the U.S.-China trade war sits at the heart of this problem because this has triggered the slow-down in global economic growth. As a result, Central Banks around the globe are facing a serious challenge and in order to combat it, they have taken the old weapon out of their monetary policy toolbox and have started to cut interest rates.
Previously, this worked, but now, this has become a poison pill; cutting interest rate has given birth to negative rates. Therefore, your high street and institutional banks can no longer make money on interest rates and we have seen the evidence of this in Scandinavian countries with the likes of Denmark and Norway.
President Trump did wish the Chinese leader a good morning in a tweet last night and the optimistic view is that perhaps this may ease tensions between the two countries. There is no doubt that opportunistic investors will waste no time going all in the moment we see the flag of ceasefire going up in the air. Until and unless this does happen, markets are in a serious trouble and safe haven assets will remain in demand
What Is The Curse Of The Inverted Curve ?
Going back to the issue of negative yield curve, the yield on the 10-year Treasury notes has dropped below the 2-year yield and this has happened for the first time since the financial crisis. There is a clear relationship of bearish trend taking off, when this takes place, and we can see how investors have become anxious about this.
The MSCI all country world index has dropped below the 200-day moving average, a technical level that traders pay respect to. The MSCI index did drop below this moving average back in May but only after the index soared nearly 6.8 percent.
The MSCI index isn’t the only one breaking a major moving average. The Dow Jones index also closed below this average yesterday, as shown in the chart below. However, the S&P 500 index is still above this critical moving average. I do believe that the ongoing weakness in the equity market is going to pull this index lower.
