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Asia Markets Mixed; Focus Remains on Treasury Yields

James Hyerczyk

It’s a relatively quiet market in Asia on Friday with the major stock indexes posting mixed performances as a result of the choppy, two-sided trade on Wall Street on Thursday. The tight ranges suggest traders are waiting for fresh signals from the U.S. Treasury markets, which are also trading rangebound. The lack of fresh developments over U.S.-China trade relations are also weighing on the volatility.

At 06:55 GMT, Japan’s Nikkei 225 Index is at 20418.81, up 13.16 or +0.06%. South Korea’s KOSPI Index is at 1927.17, down 11.20 or -0.58% and Hong Kong’s Hang Seng Index is at 25750.45, up 254.99 or 1.00%.

Australia’s S&P/ASX 200 Index closed at 6405.50, down 2.60 or -0.04% and China’s Shanghai Index finished at 2827.21, up 11.41 or +0.41%.

U.S. Treasury Rally Overdone?

Investor focus on Friday is likely to remain on longer duration U.S. Treasurys. The yield on the 30-year Treasury bond declined to a record low on Thursday, while the yield on the benchmark 10-year Treasury not touched a three-year low. Earlier in the week, the 10-year yield dropped below the 2-year yield. This brief inversion in yields has historically been a reliable indicator of economic recessions.

Some investors may have been lulled into believing that recession is imminent and guaranteed, but that’s not the case with this inversion indicator. Research shows the stock market could rally for 15 months after the inversion, and recession may not start until 22 months after the first signal is flashed.

It’s too early to conclude that a recession is definitely going to happen, furthermore yesterday’s solid U.S. retail sales report is an indication that the U.S. economy is still trending higher. Rather than look at the yield curve inversion as signaling a recession, traders should view it as a warning of what could happen if action to avoid it doesn’t take place. The Fed made this move in July, and is expected to cut rates again in September to defend the current economic expansion.

U.S.-China Trade Relations

On Thursday, a Chinese government official said China will have to retaliate against the new tariffs imposed by the United States on August 1, set to begin on September 1. Additionally, China said that the U.S. tariffs “seriously violated” a consensus reached by the two countries’ presidents at the G-20 summit in June.

Later on Thursday, a spokesperson from China’s foreign ministry said that Beijing hopes the “U.S. side will meet China half-way” on trade issues.

The language suggests the two sides are still far apart and that a short-term solution to the trade dispute is not likely. Earlier in the week, Goldman Sachs said China is not likely to make a trade deal before the 2020 election in an effort to weaken the U.S. economy.

Chinese Yuan Fix Update

On Friday, the People’s Bank of China (PBOC) set the official midpoint reference for the yuan at 7.0312 per dollar, weaker than expectations of 7.0306 against the greenback in a Reuters estimate.

This article was originally posted on FX Empire