The inversion | 30 9月 2022

The inversion


The renewed selling pressure in markets came in a last week that saw the U.S. Federal Reserve raise interest rates by three-quarters of a percentage point for a third straight time and a vow to keep it going until inflation is under control. Yields on 10-year Treasury Inflation-Protected Securities, which account for expected inflation and are known as real yields, reached 1.426%, the highest since February 2011. The inversion in the yield curve between two- and 10-year notes reached minus 52 basis points, the most inverted in at least two decades. This is a negative signal for the stock market!

Trading recommendation: sell 3722 and take profit 3600.

The inversion


As central banks hike interest rates at a pace not seen in decades to control inflation, the alarm among bond investors over looming recession risks is spreading fast. This week alone has seen major central banks deliver 350 basis points of rate hikes. Bond yield curves, viewed as good indicators of where growth and inflation are heading, signal that the magnitude of rate hikes will sharply slow growth. Typically, longer-dated yields are higher than short-dated ones to compensate investors for locking their money up for longer. When the curve between them inverts, however, it usually means trouble ahead - in the United States such an inversion is viewed as of the best-known indicators of recession. The U.S. Treasury bond yield curve is now pushing deeper into negative territory. This is a negative signal for gold.

Trading recommendation: sell 1655 and take profit 1615.

The inversion


Oil prices plunged about to an eight-month low. The super-strong dollar made crude more expensive in other currencies and fears of recession hit the demand outlook. The U.S. Federal Reserve raised interest rates by a hefty 75 basis points. Central banks around the world followed suit with their own hikes, raising the risk of economic slowdowns. Oil tanks as global growth concerns hit panic mode given a chorus of central bank commitments to fight inflation. It seems central banks are poised to remain aggressive with rate hikes and that will weaken both economic activity and the short-term crude demand outlook. On the supply side, efforts to revive the 2015 Iran nuclear deal have stalled as Tehran insists on closure of the U.N. nuclear watchdog's investigations, a senior U.S. State Department official said, easing expectations of a resurgence of Iranian crude oil exports.

Trading recommendation: range 75.50 -81.20.


David Johnson
Analyst of «FreshForex» company

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