Features

Latest recession scare is a false alarm

Markets have been spooked by the inversion of the US bond yield curve, which often – but not always – heralds a recession.

940_MW_P04_Markets_Main

City slicker: the UK is looking like a bargain right now

Early last week, global equities hit a five-month high. Then they had another growth scare. The US Federal Reserve warned that the US economy had slowed and said it would not raise interest rates this year. A gauge tracking Germany's manufacturing sector slipped to its lowest level in six-and-a-half years.

Also, the IHS Markit Purchasing Managers' index also fell below 50, the level that separates expansion from contraction. The final element of the triple whammy was the inversion of the US yield curve. The FTSE 100 slipped by 2% and Asian markets fell slightly further last week, notching up their worst week since November.

The yield curve plots the difference, or spread, between the yield on the ten-year US Treasury (government bond), and the yield on the three-month Treasury. It therefore shows how much it costs the US government to borrow money over ten years compared with three months. In normal times, the interest rate on loans rises with the lending period, so the yield curve slopes upwards.

Spooked by the yield curve

The macroeconomic backdrop certainly doesn't suggest an imminent recession. As the former Fed chair Janet Yellen told the Financial Times, the central bank is still pencilling in growth of 2% this year, which hardly amounts to "a dangerous situation". US growth may have slowed but it has hardly fallen off a cliff.

Across the Atlantic, the eurozone as a whole is faring reasonably well, says Andrew Kenningham at Capital Economics. The services and construction sectors are proving more resilient than manufacturing "even in Germany". What's more, there are signs that wage growth continues to be strong around the world. This should support consumption as well as inflation. Central banks remain supportive, with the Fed on hold and the European Central Bank announcing more credit for European banks.

There is still time

Recommended

Bondholders beware – inflation is coming, says Jeremy Siegel
Inflation

Bondholders beware – inflation is coming, says Jeremy Siegel

With vaccines promising an end to lockdowns, inflation won't be far behind, warns Jeremy Siegel, professor of finance at Wharton.
26 Jan 2021
Joe Biden’s spending spree will lift American spirits and markets – but it comes with a sting in the tail
US stockmarkets

Joe Biden’s spending spree will lift American spirits and markets – but it comes with a sting in the tail

New US president Joe Biden is planning to throw trillions of dollars in stimulus at his country’s economy. Markets will love that. But it comes with a…
25 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Three clean energy stocks for your portfolio
Share tips

Three clean energy stocks for your portfolio

Professional investor Christian Roessing of the Pictet Clean Energy Fund highlights of his three favourite stocks at the forefront of the clean energy…
25 Jan 2021

Most Popular

The FTSE 100 is set for a makeover with an influx of new tech stocks
UK stockmarkets

The FTSE 100 is set for a makeover with an influx of new tech stocks

The FTSE 100 – the dullest index in the world – is about to reinvent itself as a host of new firms list on the market. The change is long overdue, say…
24 Jan 2021
Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021