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Brexit woes and the threat [...].

Brexit woes and the threat of recession in the USA. Time to panic? asks SIMON HOLDEN, senior investment director at Investec ONCE again, market chat is dominated by two subjects: Brexit and the threat of a US recession.

Even now that we are approaching the re-set deadlines for Parliament to come up with a solution, it is not at all clear which of these is going happen first. No doubt many are hoping that neither will ever occur. That's certainly possible for the former event, but not for the second.

Even though economic cycles can rumble on for a long time - Australia hasn't had a recession since 1991, for example - they certainly haven't been abolished.

The sheer longevity of the current US cycle, which was born out of the depths of the financial crisis in 2009, is making many investors nervous, especially as it promises become the longest ever this summer.

One key early warning sign of a recession is when the yield curve inverts, and that has happened recently in the US. A yield curve inversion occurs when the yield on longer-dated government bonds falls below the yield on shorter dated instruments. An inverted yield curve implies that current interest rates are too high for the economy which is now pricing in a high probability of a quarter-point cut by the Federal Reserve later this year.

So, time to panic? Well, not necessarily. These sorts of indicators are notoriously open to interpretation. I have a range of notes from various investment bank strategists informing me of what might happen next. It has been noted, for example, that the relationship between the Japanese yield curve and the economy broke down in the 1990s.

This is important if Japan's ageing, shrinking population provides a template for the future of other maturing economies.

Our opinion is that the yield curve is one of a number of indicators worthy of monitoring. For now we accept that a US recession is out there, which curtails our appetite for risk; but it is not sufficiently close to warrant excessive caution either.

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Publication:Huddersfield Daily Examiner (Huddersfield, England)
Date:Apr 11, 2019
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