The Inversion of the Yield Curve in the Spotlight

Yield Curve

Last week the world’s traders were driven to distraction by the arcane though totally overhyped fact that short term US paper (debt, in the form of I.O.U.s sold by the government to lenders, aka. US government bonds) has a higher return on investment than debt dated in the longer term. In essence stating that today’s investor in debt places a higher risk factor on the short term than the long term. This risk perception is allegedly a sure sign of a slowdown coming.

The Week that was

Last week the major indices of the western trading world, in contra distinction to the eastern markets, were down between 1 and 4 percent on the week. No small sum of value vaporized. Spooked by the left-right combination of hard body blow of the announcement that yield curves had inverted and the peppering to the head of the world’s traders that corporate profits as well a worldwide economic activity was slowing down, traders withdrew their funds from stocks and moved them to fixed income instruments like bank deposits and bonds. The implications for future growth are significant, as a reduction in capital available for future investment will likely cause a slowdown.

Main Focus This Week

The three interest rate announcements this week are going to be the central focus of traders due to the above mentioned impact on the perceptions of the near term economic future. Should the US in particular, though the ECB is important in the mix as well as the RBA too, choose to bow to market desire and political pressure to add some more sauce to the punchbowl in order to keep the party going for as long as possible, in other words a reduction in the cost of cash – the interest rate, look for a weakening of the greenback and the Euro and the Aussie too, as a corresponding buying in stocks and a selloff of Gold.