Last Friday, for the first time since 2007, long term US interest rates have fallen below short-term rates, signalling an inverse yield curve. This situation calls for highest caution, since historically these situations were heralds of the financial crisis, the bursting of the Internet bubble and, in general, a recession.
After the announcement of the American Central Bank FED, not to raise interest rates this year and to stop the reduction of the balance sheet until the end of September, the interest rate differential between 10-year and 3-month rates but also that of 2-year bonds dropped significantly which causes alarm bells to ring. The inverse interest rates signal weak growth and inflation expectations along with higher base rates on the short end and thus a recession over the next 12-24 months.
We are not at this stage yet and the spreads have not seen their lows yet while the signal is a medium-term indicator, but it becomes clear that investors are preparing for it; especially in the light of further acts of the BREXIT-drama, and that the US-China trade conflict has not yet been resolved.
The US Equity Markets sharply reacted with a sell-off on Friday, while breaking important trading supports and a switch into „safe havens”, such as Bonds and Gold, became visible.
Negatively reinforced by weak PMI figures, the German stock market index DAX fell below the important support level of 11.400 points on Thursday and Friday which signals a break of the upward trend. The next days and weeks could be rougher and more volatile, and it is advised to check and review the portfolios. Nobody has ever died from taking profits, and building cash as a strategic asset class in order to reinvest later at lower rates seems to be appropriate.