A relentless drop in global bond yields raised fears that the world economy was hurtling towards recession and weighed on global equities on Thursday.
Expectations that the U.S. Federal Reserve and other central banks would respond robustly to the recession warning helped world stocks to steady earlier. But that recovery was cut short by the latest rhetoric from Beijing.
China’s threat to impose counter-measures in retaliation for the latest U.S. tariffs knocked stocks sprawling on Thursday. Wall Street futures erased earlier losses and were trading in the positive territory
“The only game in town is the central banks, hence the bond markets are rallying,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.
“We have regional bonfires in Hong Kong, Argentina, Japan against South Korea, and none of these are going away easily; each and every one is not necessarily strong enough to cause trouble.”
Recession fears grew on Wednesday after yields on 10-year treasury bonds dropped to less than two-year rates for the first time in 12 years, when the same yield curve inversion presaged the 2008 recession.
The curve has inverted before every recession in the past 50 years and sent a false signal just once.
Off lows
The latest inversion has since reversed, albeit marginally, and yields on 30-year treasuries rose off the record 1.965% low reached in Asian trade. But they are still down 60 basis points in just 12 sessions.
Markets appear to be pinning their hopes, yet again, on central banks, betting that scale of the scare would alarm policymakers, especially at the Fed. Money markets price in a growing chance the Fed will cut rates by half a point at its September meeting.
“We have seen stocks trading very poorly as a result of the yield curve inversion, so that will be flashing some additional warning lights for the Fed that they have to do more,” said Andrea Iannelli, investment director at Fidelity International.
“The only question is, can the Fed out-dove the market? At the very least, they will have to match market expectations in the short term.”
The Chinese comments sent a pan-European equity index down more than 0.50% and markets in London and Frankfurt lost over 1%. Earlier, Asian shares fell 0.5%. Japan’s Nikkei shed 1.2% as a yen surge hit the export-heavy market.
German 30-year yields are below minus 0.2% for the first time. Ten-year yields touched a record low of minus 0.67%.
The growth worries come amid economic stress in Argentina and some other emerging markets, fears of Chinese military intervention in Hong Kong and trade tensions that show no sign of abating.
Safety plays
As the Sino-U.S. trade war escalates, long-dated bond yields have fallen across the developed world, flattening yield curves in what is considered a clear signal of a worsening growth outlook.
What sent the U.S. curve over the brink into inversion was German data on Wednesday that showed the economy had contracted in the quarter to June. That came on the heels of dire Chinese data for July.
The British yield curve also inverted. The German curve is at its flattest since 2008.
Oil prices plunged with Brent crude losing another 2% to $58.4 a barrel, after shedding 3% overnight.
Safe-haven gold was up 0.3% to $1,520 per ounce, just off recent six-year highs.
