Dhara Ranasinghe shows us the market day ahead.

No matter how much you may believe in the signalling power the U.S. Treasury Curve, the inversion of the crucial 2-10 year segment continues to be a significant moment for global markets.

It was a brief event that occurred on Tuesday, as two-year bonds yields rose above 10 year ones. This inverted the curve for first time since 2019, which is widely thought to be an indicator of increasing recession risks. This spread hovers just below four bps in London and flirts with inversion territory.

Fed researchers suspect that the spread can be used to predict a recession. This suggests other yield curve measures may prove more reliable. However, the spread has an impressive track record of being a good recession indicator.

An inverted Treasury curve is usually followed by a recession within two year since 1960s. The 2020 downturn due to COVID-19 was the latest example. Markets and the Fed will not lose the meaning of this latest inversion.

Another momentous event for bond markets was the rise in the yield on the German two-year bond. It climbed briefly to positive territory for just a few seconds. This is the first time the German 2-year bond yield has risen in over eight years. This yield was at minus 80bps just three weeks ago.

Bond yields could rise as Germany warns that it may face a crisis in gas supplies, despite inflation rising.

Graphic: U.S. yield curve inverts – https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgqbwzpb/morningbid.PNG

Russia-Ukraine discussions will be the focus of attention, while positive headlines could trigger a risk-on move.

As hopes rose for an amicable settlement to the Ukraine conflict, Asia shares rallied. Futures for European stocks are mixed, while those in the United States are slightly softer.

Although equity markets seem to be rallying on any mood, uncertainty is high so that will be tested soon.

You should also keep an eye out for German inflation data later in the day.

Markets should be more informed by key developments on Wednesday

Japan increases defense of its benchmark yield in the face of global pressures

Shanghai lockdown forces auto manufacturers to scramble

ECB president Christine Lagarde, Pierre Wunsch, member of the Governing council, Edouard Fernandez Bollo supervisor for ECB banks, Fabio Panetta, member of the ECB board, speaks before European parliament

Fed Speakers: Kansas City President Esther George and Atlanta President Raphael Bostic. Richmond President Thomas Barkin

Ben Broadbent, Bank of England Deputy Governor

US ADP Private Sector Payrolls/Final Prices for Energy/final Quarter GDP Deflator

– Emerging Markets: Malaysia Central Bank Annual Report and Economic Review, Thailand, Georgia Hold Rate Meetings