Sunday, 22 September, 2019

Dow drops 800 after bonds flash warning

A barge built with four levels of shipping containers is seen at Pier 1 at Treasure Island in San Francisco California in this file 30-year Treasury slumps to historic low as recession fears spike
Russell Knight | 19 August, 2019, 01:39

The 30-year Treasury bond yield fell to a historic low on Thursday, slumping below 2 percent for the first time ever amid fears of an impending global recession, which pushed markets lower around the world.

Global growth woes have mounted in recent months, especially as a bruising trade war between the United States and China showed signs of dragging on in a blow to businesses and consumers. Japan's Nikkei 225 (^N225) trailed almost 1.5% lower, while Hong Kong's Hang Seng Index (^HSI), and China's Shanghai Composite (000001.SS) were down for most of the day, recuperating to trade flat at the send of the session. As we can see from the chart, which I borrowed from Jeroen Blokland (@jsbloklan on Twitter), the average lag from the last five occurrences from inversion (in 2s vs 10s) to an eventual recession has been 21 months.

Losses were more modest in Shanghai and Hong Kong and shares in London and NY were on course to bounce back on Thursday.

Still, the inversion between two-year and 10-year bond notes, last seen in 2007 as the American economy lurched into a recession, spooked investors.

Still, oil prices fell on Thursday to extend steep overnight losses as US crude inventories unexpectedly rose, fears of recession mounted and economic data out of China and Europe disappointed.

South Korea's market was closed on Thursday for a public holiday. -China trade relations and signs global growth is slowing, was bolstered by weak Chinese and German economic data.

Investors panicked, and stocks plunged, after the main yield curve inverted for the first time since 2007. And looming over it all was the 10-year Treasury yield dipping below the two-year, in what's considered a harbinger of a US economic recession in the next 18 months.

Wall Street was hit with worrying news of another recession on Wednesday after the Dow Jones Industrial Average dropped more than 3%, its worst day of the year.

It was the worst day for the major indexes since December 2018.

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Germany reported a contraction in second-quarter gross domestic product, and China's industrial growth in July hit a 17-year low.

"Bond markets have been flagging this move for some time, but the shift was crystallised by yesterdays run of doom and gloom European and Chinese economic data", wrote Stephen Innes, managing partner for Valour Markets Pte in Singapore, in a research note.

Despite the negative knee-jerk reaction to the news, most market experts are sharing a more measured response to the inversion. The stock market, which fell 800 points today, looks pretty distressed too.

This is significant. When shorter-term rates are higher than longer-term bond yields, that is known as an inverted yield curve.

The U.S. stock futures ESc1 managed to steady a little in Asian trading, erasing earlier losses. Investors do not believe in long-term growth in the US, and a weaker economy would not allow the Fed to raise its rates.

The dollar recovered from early weakness but a gauge of world equity performance edged lower on Thursday as concerns about global growth offset investor optimism over a surge in USA retail sales last month and strong Walmart earnings.

The yield curve inversion also suggests that investors expect the Federal Reserve to keep cutting short-term interest rates in an effort to boost the economy, Rehling says.

Global benchmark Brent crude LCOc1 fell $1.50 to $57.98 a barrel.

The yen was flat at 105.8 to the dollar JPY=, having earlier traded at 106.74. The dollar index .DOXY rose 0.15%, with the euro EURO= down 0.26% to $1.1109.

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