Today will be one of the most challenging meetings for the Reserve Bank of Australia (RBA) since the global financial crisis as global markets nosedive amid a sharp rise in the risk of a recession.
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index plunged 2.7% in early trade with just about every stock slumping – unless you are a gold miner!
The worst performers on the top 200 benchmark are the Service Stream Limited (ASX: SSM) share price with a 17.4% loss to $2.32, the WiseTech Global Ltd (ASX: WTC) share price with a 11.2% plunge to $26.01 and the Appen Ltd (ASX: APX) share price with its 11.1% decline to $23.90.
The latest meltdown was triggered by a sharp step-up in trade tensions between the US and China with the Asian giant weaponising the yuan.
Yield inversion steepens
What's should be more alarming to investors is that the bond markets are flashing red for recession!
The US Treasury yield curve inverted the most since before the 2008 GFC with the 10-year rate falling before the 3-month yield by 32 points, according to Bloomberg.
The inversion in Australian government bond yields is also steepening even with the yield on our 10-year government debt crashing below 1% for the first time in history.
Yields on the 2-year Aussie bond yield is over 20 basis points below the 1-year, while the 5-year yield is 4.2 basis points lower than the 2-year, according to data sourced from worldgovernmentbonds.com.
Why ASX investors should care about bond yields
Longer term debt should command a higher yield to compensate investors for the extended duration (time is regarded as a risk in the world of finance), and when the opposite happens, it almost always leads to a recession for the US.
The inversion of Australian bonds in themselves isn't necessarily a warning sign as our bond market isn't as deep as the US, but when the inversion happens on both sides, I am willing to bet the RBA will sit up and notice!
This also means that our central bank's rate decision and outlook commentary will be more heavily scrutinised than normal by ASX investors.
Whether the RBA cuts rates today isn't as important as its subtle comments on how far it might be willing to go to protect our economy (and share market by extension).
There's growing speculation that the US Federal Reserve will be forced to cut rates to zero again if we suffer a full-blown and protracted trade war, and there's no way the RBA will not become aggressively dovish under such a scenario.
It's almost unthinkable, but rates in this country could also be heading towards zero and investors will be hunting for hints of this outcome in RBA governor Philip Lowe's monetary statement that will be released at 2.30 this afternoon.
Central bankers are equity investors best mates!
