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Wednesday's Blood Bath: What It Means For You, The Markets And FX

By Kathy LienMarket OverviewAug 14, 2019 06:53PM ET
www.investing.com/analysis/wednesdays-blood-bath-what-it-means-for-you-the-markets-and-fx-200455218
Wednesday's Blood Bath: What It Means For You, The Markets And FX
By Kathy Lien   |  Aug 14, 2019 06:53PM ET
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Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup August 14, 2019

Most people have a simple and basic understanding of what a yield-curve inversion means. They know that it is unusual and every headline tells them that it's bad news for the economy. Some are even aware that when a yield curve inverts, long-term interest rates fall below short-term interest rates as investors require greater return for locking up their funds for 2 vs. 10 years. Yield-curve inversions in the US and UK triggered a wave of panic in the financial markets on Wednesday. The Dow Jones Industrial Average dropped more than 800 points, money flocked into safe-haven currencies, gold prices increased and the cost of a barrel of oil fell sharply. All of these moves are consistent with risk aversion.

Investors are anxious because yield-curve inversions accurately predicted each of the last 7 recessions – including the 'Great Recession.' But it is important to understand that while recessions are always preceded by yield-curve inversions, inversions do not always lead to recessions. There are plenty of false positives and according to a Credit Suisse (SIX:CSGN) study, it could be 22 months before a recession follows. Also, many officials from the Fed have expressed their skepticism about the importance of the shape of the yield curve. They believe other factors influence the curve’s shape besides the future strength of the economy like the low level of term premiums, which can be affected by central-bank buying. Central-bank activity could undermine the accuracy of the yield curve as an indicator of economic activity. This is also the first yield-curve inversion since 2007-2008 and when premiums are low, inversions can become more frequent without an increased risk of recession.

With that said, you should be worried. It would be easy to dismiss the signal from the yield curve if the global economy was doing well and brighter times were ahead – but that’s not the case. Well before the yield curve inverted, central bankers across the globe were talking about weaker growth. Many resorted to easing monetary policy to boost inflation and activity and more accommodation is expected in the next few months from major central banks like the Fed and ECB. Between the intensifying US-China trade war, Brexit, protests in HK and political trouble in Italy, portfolio managers and investors have a lot to worry about. Any one of these issues could tip one if not many countries into recession. So regardless of the durability of the yield-curve inversion, the risk of recession this cycle is greater than it has ever been.

For consumers, borrowing rates will fall but stock-market losses could accelerate. For investors, more money will rotate from stocks to bonds, leading to a broader decline in the Dow and S&P 500. For currency traders, the pairs that are the most sensitive to risk appetite – like USD/JPY and NZD/JPY – will be hurt and the ultimate winners will continue to be the funding currencies like the Japanese yen, Swiss franc and to some degree, also the euro.

As we said at the start of the week, nothing matters more than risk appetite and news bombs. EUR/USD broke down despite slightly better EZ GDP data while GBP/USD was flat despite stronger inflation. Australian labor-market data was due for release Wednesday evening and was only expected to have a meaningful and lasting impact on the Australian dollar if it comes in weak, reinforcing current market sentiment. UK and US retail sales numbers were also on the calendar and while wage growth accelerated in July, retail sales alone won’t affect the market’s expectations for Fed easing and recession.

Wednesday's Blood Bath: What It Means For You, The Markets And FX
 
Wednesday's Blood Bath: What It Means For You, The Markets And FX

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Joseph Loud
Joseph Loud Aug 15, 2019 1:15AM ET
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Necessary to discriminate : USA-Rest of OCDE- Emerging Economies ; USA economy is still robust , but its stock market is way overbought . Rest of the OCDE is tipping into recession ( Italy Germany UK ) their stock market are overbought -  Emerging economies ( BRICS etc..) are in full recession or  into deep crisis ( Argentina Turkey ) . So it's sunny in the US but for how long ? Thanks to the King Dollar and the US Army , USA are insulated from exotic diseases , and the US income are  70% generated from internal consumption . USA are a continent almost self-sufficient , take it as a blessing .
Partap Singh
Partap Singh Aug 14, 2019 11:50PM ET
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thank you Kathy
Jeff Ang
Jeff Ang Aug 14, 2019 11:49PM ET
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Inverted curve served as an indicator but won’t confirm the recession.
Solomon Junior
Solomon Junior Aug 14, 2019 11:42PM ET
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Again, tomorrow the market will fight back and recovery by 700 to 1000 points!
Uz IL
Uz IL Aug 14, 2019 11:35PM ET
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Very good, Kathy. Thanks. :-)
Seshu Tirumalasetty
Seshu Tirumalasetty Aug 14, 2019 11:13PM ET
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Good article
ga tito
ga tito Aug 14, 2019 10:14PM ET
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Nothing new but at least some clarification to people that are confused about the news. Really everybody expect a forecast and that is another story.
Muhammad Shahid
Muhammad Shahid Aug 14, 2019 9:22PM ET
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nicely elaborated...
Charles Charles
Charles Charles Aug 14, 2019 7:00PM ET
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Nice piece, pls can anyone tell me if the AUD employment change will likely have higher than expected this Thursday?
Jason Sauer
Jason Sauer Aug 14, 2019 6:54PM ET
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great information 4 months ago
Robert Nowogórski
Robert Nowogórski Aug 14, 2019 6:15PM ET
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It means: time to hedge. Long awaited big correction in progress.
Aaron Rafelle
MadDogTrader Aug 14, 2019 6:05PM ET
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well written article! If only more writers on this platform were as capable.
Adrian Flores
Adrian Flores Aug 14, 2019 5:51PM ET
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Excellent data... Thanks
Elephan Mann
Elephan Mann Aug 14, 2019 5:51PM ET
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Very insightful thank you.
Daniel Rutto
Daniel Rutto Aug 14, 2019 5:49PM ET
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Great analysis
Kenneth Gold
Kenneth Gold Aug 14, 2019 5:42PM ET
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Thank you. Your articles are insightful.
Michael George
Michael George Aug 14, 2019 5:41PM ET
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Perfect analysis
KavehA
KavehA Aug 14, 2019 5:40PM ET
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News bombs! LOL! Love the imagery.
Steve Swisher
Swish Aug 14, 2019 5:34PM ET
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Well said
Valentino Bastian
Valentino Bastian Aug 14, 2019 5:34PM ET
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Nice analysis
Vinoda Mukar
Vinoda Mukar Aug 14, 2019 5:34PM ET
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alex gallegos whay help bro?
Alex Gaitan
Alex Gaitan Aug 14, 2019 5:26PM ET
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Awesome article
vic tor
vic tor Aug 14, 2019 5:09PM ET
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As for me this article just hides gems in plain sight. Very interesting, thanks.
 
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