Flattening is not flattering

The festive season officially kicked in, with lights and ornaments illuminating the streets and children full of joyful anticipation of the gifts to come. And on the first day of December, it seemed that the festive atmosphere would spread to the markets as the United States and China agreed to a 90-day truce at the G20 summit. This instantly lit up the investors’ mood that had been clouded for months by the escalating trade war between these two countries. Markets rallied across the board.

But the euphoria did not last long. On Tuesday, markets turned red and the American indices plunged, the S&P 500, Nasdaq and Dow Jones all sliding more than 3%. The selloff was triggered by renewed worries over the trade war - which worsened by the end of the week with the arrest of the CFO of the Chinese Group Huawei on US charges - and rising fears of an economic slowdown. 

Indeed, the evolution of a closely watched market indicator, the US yield curve, stirred some anxiety among investors. This curve, which spots the yields of bonds against their maturities, is flattening and has even partly inverted, with the US two-year bond yield rising above the five-year one. An inversion of the curve is rare and is viewed by many as a predictor of recession, based on the fact the US yield curve has inverted before each recession since the Second World War. The market primarily focuses on the difference of yield between the two-year and ten-year bonds, and, although this part of the curve has not inverted, it has divided by more than 2 within a week, dropping to 11 basis points on Tuesday, its lowest point since 2007.

In this context the financial sector ended the week heavily down with the Stoxx Insurance declining 5.4% and Ageas 5.2%.