The US market tumbled on Friday as manufacturing activity fell to a 21-month low and yield on 3-month treasuries rose above the rate on 10-year treasuries, sparking fresh worries about the global economy.
The US markets saw significant falls in all sectors, notably basic materials (-2.8%), financials (-2.4%), technology (-2.2%) and healthcare (-2.0%).
What will happen to ASX shares this week?
Things aren't looking pretty. The ASX200 closed lower on Monday, falling 69 points or 1.11%, and Dow futures are currently poised to fall 77 points or 0.3%.
The flattening yield curve, or the difference between short and long-term rates, has worried investors for months. A narrowing spread is typically seen as a sign that long-term economic confidence is dwindling. Bank stocks are particularly sensitive to interest rates and economic worries.
Bond yields fell to their lowest levels in more than a year after the US Federal Reserve said it was seeing slower growth and no longer expected to raise interest rates in 2019. Investors are also loading up bonds, sending the yields lower. The US Government Bonds 10 YR Yield, often referred to as the risk-free rate, fell to 2.44%.
Such emerging woes about the flattening yield curve and slowing global growth only adds further insult to injury to our own domestic issues such as the property market and per-capita recession.
With the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corporation (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) accounting for roughly 20% of the ASX200's weighting, the pain will be felt.
What should investors do?
Many believe the financial markets are in a "late bull cycle" so perhaps it is within the cyclical nature of the markets for a new phase – enter the bear.
It has been incredibly surprising to see the markets march on and rebound so quickly following December lows, despite global and domestic economic conditions slowing down.
I believe there is nothing wrong with taking profits, or partial profits. Especially when the markets are looking quite "toppy" and economic conditions are slightly deteriorating. It is in such scenarios of uncertainty and volatility that cash is king.
Foolish takeaway
Be wary and nimble my Foolish investors as the market is at its crossroads. On the flip side, reserve banks have enough room to cut rates to bolster the markets and a US-China trade deal could be struck. But in the meantime, tread carefully and don't let your emotions get the best of you.
