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Dow Set To Renew Slide To Start The Week As 10-year Bond Yield Extends Retreat

U.S. stocks benchmarks looked poised to stumble on Monday as tariff fears drag a key bond benchmark to its lowest level in about 20 months, deepening a so-called yield-curve inversion that has accurately predicted economic recessions.

How did major benchmarks fare?

Futures for the Dow Jones Industrial Average were off 94 points, or 0.4%, at 24,727, those for the S&P 500 index were off 10.6 points, or 0.4%, at 2,742.25, while Nasdaq-100 futures were down 38.75 points, or 0.5%, at 7,095.75.

On Friday , the Dow dropped 354.84 points, or 1.4%, to 24,815.04. The S&P 500 index fell 36.80 points, or 1.3%, to 2,752.06 and the Nasdaq Composite dropped 114.57 points, or 1.5%, to 7,453.15.

The declines resulted in one of the worst Mays for stocks in years, with the Dow falling 6.7% while the large-cap index lost 6.6% and the Nasdaq declined 7.9%.

What drove the market?

The benchmark 10-year Treasury yield deepened its so-called inversion against the shorter-dated 3-month Treasury bill, as worries about trade relations between China and Mexico intensify, rippling throughout global markets.

The yield curve, which measures the difference between the yield on the longer-dated Treasury and its shorter-dated counterparts, tend to slope upward because investors usually demand higher yields for extending loans over a longer period. An inversion of the yield curve, particularly at the 10-year/3-month, has preceded the past seven recessions, while throwing out two false positives with an inversion in late 1966 and a very flat curve in late 1998, according to the Federal Reserve Bank of Cleveland (https://www.clevelandfed.org/our-research/indicators-and-data/yield-curve-and-gdp-growth.aspx).

The moves come even as some signs of moderation of trade tensions have emerged, with officials from Beijing and Mexico indicating that they are willing to negotiate with the U.S. on trade issues as tensions ramped up.

Tariff worries among investors reached a fresh degree of consternation for fixed-income and stock-market investors after Trump said on Twitter that the U.S. would impose higher tariffs on Mexico beginning June 10 if the country doesn’t stem the flow of migrants across the border.

More bellicose rhetoric on trade also has driven yields, which move in the opposite direction of prices, for European bonds substantially lower, as investors flee to the perceived safety of government paper here and abroad. German bonds, a closely watched bond proxy for Europe, has deepened its slide into negative territory, with the debt at negative 0.215%, according to FactSet data.

Meanwhile, President Trump has arrived in London for a state visit amid Political Upheaval Mr. Trump’s visit is likely to feature mostly festivities and commemorations, and little deal-making.

What are strategists saying?

“Trade tensions continue to weigh on stocks, and President Trump has touched down in the UK, and given that he is at the centre of the trade spat, dealers will be playing close attention to what he has to say. The US president has taken a tough stance on China and Mexico recently, and it is possible he might weigh in on the Conservative Party leadership race, and that could trigger volatility in the pound,” said David Madden, market analyst at CMC Markets UK, in a daily research note.

“As traders embark on a new trading month, the worries over the trade war are inflating,” wrote Peter Cardillo, chief market economist at Spartan Capital Securities, said in a Monday research note.

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