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The global economy has been slowing for some time. The question is whether we are heading for a soft landing or something worse. Investors sold riskier assets, involving equities, for safe havens such as gold and government bonds. The Markets were reacting to alarm signals from two of the world’s most important economic indicators. The yield curve, a gauge of further growth considerations, upturned last week in the UK and US. The Yield curve measures the gap between the interest rate or yield on ten year government bonds and shorter maturity debt. The Central banks principally set short interest rates while long term yields are resolute by market predications for growth and inflation.
The Ten year rates drop below three month rates, as they have done in the US and the UK, the Curve inverts signaling that short rates are too high and growth considerations are weakening. The fact that each of the last seven US recessions were precede by an inverted curve explains why the equity market took anxiety last week to the inversion of the yield curve. The Second worry relates to the devaluation of the Chinese renminbi. This started last year as trade conflict between the US and China over exports of metals has widened, taking in consumer goods and technology.
This month a new front in that conflict opened with the Reminbi falling through the Symbolic threshold of Seven Yuan to the dollar for first time since the Financial Crisis. The US interpret the fall as an attempt by the Chinese authorities to gain unfair export advantage. Prompting the US Treasury to name China a currency manipulator. The Markets worry that the Trade war could be Morphing into a currency war. That conjures up the Spectre of the competitive devaluations which accompanied and reinforced, the Great Depression of the 1930s .
A run of scrawny economic data have added to market anxieties. GDP growth in Germany and the UK unexpectedly slender in the Second quarter of the year. The Chinese Industrial activity has slowed markedly, to the lowest level in 17 years. Growth in worldwide export volumes has almost ground to a close down.