Wall Street was closed on Wednesday to mourn former President George H.W. Bush. On Dec 4, U.S. stocks suffered heavy losses due to yield curve inversion of U.S. government bonds and skepticism of investors’ regarding a permanent solution to eight-month trade conflict between the United States and China. Moreover, Brexit related confusion also dented investors’ confidence. U.S. stock markets are likely to continue downward trend as futures on all three major stock indexes – the Dow, S&P 500 and Nasdaq Composite – opened deep in the red on Thursday.
Sovereign Bond Yield Inversion
On Dec 4, yields on 2-Year US Treasury Note (2.811%) and 3-Year US Treasury Note (2.808%) outpaced the yield on 5-Year US Treasury Note (2.79%). This indicates short-term interest rates are higher than long-term interest rates. This happens when market participants become more uncertain about economic growth. For many industry experts, this is a clear signal of an impending economic slowdown.
Moreover, the yield on 10-Year Treasury Note closed at 2.921%, its lowest in three months and largest single-day decline since Oct 11. The benchmark government bond yield also fell below its 200-day moving average at 2.957%. Following these developments, the spread between the yields of 2-Year and 10-Year US Treasury Notes stood at 11 basis points, the narrowest gap in 11 years. A yield inversion between 2-Year and 10-Year government securities is generally considered as a recessionary indicator for the U.S. economy.
Skepticism Over US – China Trade Truce
Investors have become skeptical regarding a permanent solution to eight-month trade conflict between the United States and China. On Dec 1, the U.S. President Donald Trump and his Chinese counterpart Xi Jinping reached an initial agreement per which the trade truce will be valid for next 90 days.
However, there was confusion regarding the starting date. Trump’s economic adviser Larry Kudlow announced the clock will start from Jan 1, 2019. However, White House later corrected it with a starting date of Dec 1, 2018. Finally, on Dec 4, President Donald Trump once again reminded China that tariff is still an important weapon for him and can use it again against China in near future.
Consequently, shares of trade-sensitive stocks like Caterpillar Inc. (CAT - Free Report) and The Boeing Co. (BA - Free Report) plummeted 6.9% and 4.9%, respectively. The Boeing carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Concerns Over Brexit Negotiations
On Dec 4, the UK members of Parliament voted that Prime Minister Theresa May’sgovernment had been in contempt of Parliamentas it was required to publish the full legal advice on the Brexit deal. Notably, on Dec 11, the UK parliament will vote on the Brexit deal that the Theresa May government has formed with the European Union (EU). If the deal failed trust vote, then the UK Parliament will regain control of power to negotiate with the EU.
Meanwhile, the European Court of Justice — the highest court of the European Union allowed the UK parliament to take back the Brexit decision.
Stocks That Made Headline
PepsiCo Acquires SodaStream, Expands Beverage Portfolio
PepsiCo Inc. (PEP - Free Report) successfully sealed its previously announced deal to buy all outstanding shares of SodaStream International Ltd. for cash outlay of $3.2 billion ($144 per share). (Read More)
Hawaiian Holdings Arm Posts Nov'18 Traffic, Cuts Q4 RASM View
Hawaiian Holdings’ (HA - Free Report) subsidiary Hawaiian Airlines reported traffic figures for November. Traffic (measured in Revenue Passenger Miles or RPMs) increased 2.8% to 1.37 billion in the month. (Read More)
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