Four market trading days this week wiped out sizable stock market gains and reset expectations for future Fed rate intervention. After President Trump’s meeting with Chinese President Xi last weekend, the week started strong as investors were hopeful the ever increasing of tariff war would come to a standstill. However, ambiguity regarding the strength of any deal terms and a partial inversion of the yield curve sent stocks in a free fall on Tuesday. Stocks had a small break on Wednesday as the markets were closed for a Day of Mourning for the funeral of George H. W. Bush and then continued their slide Thursday and Friday following the arrest of Meng Wanzhou, CFO of Chinese tech company Huawei.
US large and small cap stocks both took a dive this week with small caps taking the brunt of the declines. International stocks fared a bit better on expectations that fewer rate US rate hikes are in store for 2019. Bond funds rallied as the yield curve changed shape. The 5-year Treasury rate ended the week two basis points below the 2-year Treasury meaning that part of the curve is now inverted. This is an indication that investors are willing to pay more to lock in a lower rate with the expectation that near-term risks may ultimately drive rates lower. While it would be more concerning if the 10-year Treasury was lower than the 2-year, it still unnerved investors. However, given that many economic indicators are still strong, this view could change quickly.
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