What happened?

Yesterday, the Australian Stock Exchange (ASX) had its worst single day in 18 months.

The US 10-year bond yield fell below the level of the US two-year bond yield, also known as inversion, which tends to precede a global recession.

How did it happen?

The fall was prompted by the “negative yield curve”. This is a phenomenon in the bond market in which longer-term interest rates fall below shorter-term interest rates. The New York Times has a great sports analogy to help explain it.

Of increasing importance are global events including the escalating trade tensions between China and the USA, and the social unrest in Hong Kong which are unlikely to have an impact on the market if prolonged.

What’s likely to happen next?

The Reserve Bank of Australia (RBA) is resisting a knee-jerk response. RBA governor, Guy Debelle, is quoted in the Australian Financial Review today as saying: “I’m not sure I would be relying on the yield curve as the best signal of that risk given the yield curve has obviously not got the same sort of structure that it’s had historically.” He suggests the risks appear more balanced and that a pattern of upbeat labour market will go in Australia’s favour.

The Australian jobless rate was flat at 5.2 per cent seasonally adjusted in July, adding 41,100 jobs, and average weekly earnings growth for full-time workers reached a six-year high of 3.1 per cent, new employment indicators show.

Nothing is certain when it comes to market performance. We monitor the market very closely and we urge investors to be alert, but not alarmed. If you are concerned about your portfolio, please make an appointment to see our Financial Services team on 02 4320 0500.