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Inside the Market Canada’s arrest of Chinese executive, OPEC and the yield curve combine to create a big, fat market mess

A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web

Markets are a mess.

News overnight that Canadian officials, at the U.S. government’s request, arrested the chief financial officer of Chinese telecom equipment giant Huawei Technologies Co Ltd sent S&P 500 futures markets into such an intense downward spiral that the Chicago Mercantile Exchange was forced to enact trading curbs to prevent a giant loss. Futures now point to a 1.9-per-cent drop for the S&P 500 at the open.

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Huawei’s CFO Meng Wanzhou just happens to be the daughter of the company’s founder and a tweet forwarded by CNBC’s Carl Quintillina outlines how strong the reaction in China is likely to be,

“Imagine for a second that the Chinese government arrested the CFO of Apple and extradited him ... While it’s not the case, also imagine if the CFO was the child of Steve Jobs. I’ll leave my comments at that.”

U.S. Chinese relations were already strained after president Donald Trump’s bombastic (and so far largely unsubstantiated) claims of trade gains after the last series of negotiations. Deutsche Bank chief economist Zhiwei Zhang outlined the potential market impacts in a report entitled “A War Beyond Trade (5): Huawei case is a big deal”,

“We believe this is a clear signal that the trade war is escalating to a new level. We think the probability of US and China reaching a trade deal by Mar 1 has dropped to 30% from 40%. US business interests in China face higher risk than before … Public opinion in China will likely become more negative in respect to the trade war, and potentially against US companies … The trade talk has just been resumed at the G20 meeting; now its outlook has darkened.”

“Canada arrests Huawei’s global chief financial officer in Vancouver” – Globe and Mail

“@SBarlow_ROB DB: Huawei case is a big deal” – (research excerpt) Twitter

“China says Canada, U.S. have not explained Huawei executive's arrest” - Reuters

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“Global stocks slump on China executive arrest, oil spills into OPEC” – Reuters

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Oil prices are also getting pummeled (down five per cent at time of writing) after Saudi officials proposed a smaller output cut than the market expected,

“Expectations had been for a joint cut of between 1 and 1.4 million barrels per day (bpd), until Saudi energy minister Khalid al-Falih said before the meeting that the “OPEC+” group would be happy with a cut of just 1 million bpd… “Overall, this shows the weak momentum in the market right now and it has clearly not been helped by what has happened over night ... with the sell-off in stocks and weakness in bond yields,” Saxo Bank senior manager Ole Hansen said.”

“Oil loses 3 percent in volatile trade as OPEC meets” – Reuters

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If all that’s not enough, the U.S. yield curve is steadily flattening. Historically, an inverted yield curve - when 10-year U.S. Treasury yields fall below 2-year yields - has signaled an approaching recession. Importantly, there are reasons that the yield curve may not be as reliable an indicator as in previous periods. The Federal Reserve has purposely manipulated longer term yields lower to stimulate growth, and an aging population’s desperation for yield has also pushed ten year yields lower than they would otherwise be.

“Explainer: What is an inverted yield curve?” – Reuters

David Rosenberg: Ignore the yield curve ... at your peril – Report on Business

“Why investors near retirement should fear the big yield curve inversion” – CNBC

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Tweet of the Day:

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Diversion: “The era of human gene-editing may have begun. Why that is worrying” – The Economist

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