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Last week, the front-end of the US overnight index swap (OIS) curve, as represented by the spread between the one- and two-year forward points, inverted (turned negative). To put it another way, the one-year rate rose above the two-year rate, pushing the spread below zero. 

“The spread had improved rapidly and turned significantly positive after the dramatic policy response to the virus crisis last March, it has been slipping over the past couple of months and turned negative last week. It printed -3bp negative on Monday, June 29th,” said JPMorgan (JPM)’s quantitative analyst Nicholas Panigirtzoglou, according to ZeroHedge’s Tyler Durden. 

An inverted curve represents a liquidity crunch. “Rate markets are signaling the need for further monetary and/or fiscal policy stimulus across developed economies.  If the Fed turns a deaf ear to this latest extortion attempt by the market and additional stimulus is not delivered, then the inversion at the front end could worsen, “eventually becoming a more problematic signal for equity and risky markets going forward,” according to JP Morgan. 

Put simply, stocks will likely come under pressure in absence of additional monetary or fiscal stimulus., in which case, anti-risk assets like the Japanese yen would shine.