EUR/USD likely to find a peak near 1.25: UBS
* 10-year U.S. yields drop under 2-yr 1st time in 12 years
* Markets fear inversion heralds recession, hope for Fed
rescue
* Oil extends big overnight drop on demand, supply pressures
(updates throughout, changes byline, dateline)
By Sujata Rao
LONDON, Aug 15 (Reuters) - World shares held at 2-1/2-month
lows on Thursday and Wall Street was set for a firmer open as
investors bet the U.S. Federal Reserve and other central banks
would respond strongly to recession warnings emanating from bond
markets.
European shares opened higher and futures flagged a 0.5%
rise on Wall Street, where all three indexes fell 3% on
Wednesday after an inversion of U.S. government bond yields
sparked fears that the world's biggest economy would hurtle
towards recession, dragging the rest of the globe with it.
Yields on 10-year Treasury bonds US10YT=RR dropped below
shorter two-year rates for the first time in 12 years, when the
same the yield curve inversion presaged the 2008 recession.
The curve has inverted before every recession in the past 50
years, offering a false signal just once in that time US/
The latest inversion has since reversed, albeit marginally,
and yields on 30-year Treasuries US30YT=RR rose off the record
1.965% low hit in Asian trading. But they are still down 60
basis points in just 12 sessions.
Meanwhile German 30-year yields are below minus 0.2% for the
first time, while 10-year yields touched an all-time low of
minus 0.665% before inching higher.
A pan-European equity index opened marginally firmer
.STOXX while S&P500 futures rose 0.6% ESc1 . Asian shares
however fell 0.5%, with Japan's Nikkei shedding 1.2% as the
recent yen surge hit the export-heavy bourse .N225 .
MSCI's world equity index .MIWD000000PUS was down 0.2%,
attempting to steady after the previous day's 2% rout.
Markets appear to be pinning their hopes, yet again, on
central banks, betting that scale of the scare would alarm
policymakers, especially at the Fed.
"The only game in town is the central banks," said Peter
Schaffrik, global macro strategist at RBC Capital Markets
Economic stress in Argentina, fears of Chinese military
intervention in Hong Kong and trade tensions worldwide are all
pressuring the economic outlook, analysts note.
"You have a lot of forces that weigh on the global economy
which doesn't really mean it needs to be a recession. The only
policy response is from central banks, hence the market is
rallying," Schaffrik added.
Money markets price a growing chance the Fed will cut rates
by half a point at its September meeting. FEDWATCH
"Hoping for the best on the policy front but positioning for
the worst on the economic backdrop seems to be the flavour of
the day," said Stephen Innes, a managing partner at Valour
Markets.
"The Fed, now out of necessity alone, will need to adjust
policy much more profoundly than they expected."
Moreover, not everyone buys the argument that recession is
inevitable, given that bond markets have been distorted by a
decade of multi-trillion dollar central bank stimulus.
Mark Haefele, chief investment officer at UBS Global Wealth
Management said how long the curve remained inverted, and to
what extent, was crucial.
"If Fed rate cuts successfully steepen the curve comfortably
into positive territory, this brief curve inversion may be a
premature recession signal. Neither does a yield curve inversion
indicate it is time to sell equities," Haefele said.
He noted that since 1975, every curve inversion had been
followed by an S&P500 rally which lasted almost two years and
delivered gains of around 40% on average.
SAFETY PLAYS
Global growth concerns have mounted as the Sino-U.S. trade
war escalated, and what sent the curve over the brink was German
data on Wednesday showing the economy had contracted in the
quarter to June. That came on the heels of dire Chinese data for
July. These concerns have sent oil prices plunging with Brent
crude LCOc1 losing another 0.5% to $59.16 a barrel, after
shedding 3% overnight.
Gold has surged to six-year highs, benefiting, like bonds,
from investors' need for safe-haven assets. It dipped on
Wednesday by 0.2% to $1,512 per ounce XAU= but stayed near its
recent $1,534 high.
The yen too pulled back 0.3%, having firmed for eight of the
past ten sessions against the dollar JPY=D3 . Excluding a
mini-crash episode in January, it recently hit 17-month highs
JPY=D3 .
The dollar index .DXY was a shade easier at 97.925, with
the under-pressure euro at $1.1149 EUR= following Wednesday's
soft German data.
Mizuho senior economist Colin Asher forecast more yen
strength.
"Regardless of the type of slowdown in the US, it will be
bad news for the Japanese economy as one of its major trading
partners heads for slower growth," he said. "This is likely to
be negative for asset markets and boost demand for the yen."
U.S. yield curve inversion Aug. 14 2019 Image https://tmsnrt.rs/2YQ1VhR
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