Global stocks crumbled and oil prices extended a punishing sell-off on Thursday as an inverted U.S. bond yield curve intensified fears about a world recession.
Markets in Asia were already on the backfoot after all three major U.S. stock indexes closed down about 3% overnight, with the blue-chip Dow (DJI) posting its biggest one-day point drop since October.
The tumult in stocks was triggered by an overnight intraday fall in yields of 10-year U.S. Treasury notes (US10YT=RR) below the two-year yield (US2YT=RR), the first such drop since 2007, in what is known as a yield curve inversion and widely seen as a sign of a looming recession.
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.
The debilitating effects of the Sino-U.S. trade war on growth were on full display this week as Germany's economy contracted in the second quarter and a raft of Chinese economic data pointed to deepening gloom in the Asian powerhouse.
(Graphic: U.S. yield curve inversion Aug. 14 2019 - https://tmsnrt.rs/2YQ1VhR)
MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.9% in early trade, while Japan's Nikkei average (N225) tumbled 1.4% and Australian stocks (AXJO) sank 2.1%.
Chinese markets were also hit, with the benchmark Shanghai Composite (SSEC) and the blue-chip CSI300 (CSI300) down 1.1% and 1.0%, respectively, while Hong Kong's Hang Seng (HSI) lost 0.8%.
"The yield curves are all crying timber that a recession is almost a reality and investors are tripping over themselves to get out of the way as economic recession hurts corporate earnings and stocks can drop as much as 20%," said Chris Rupkey, chief financial economist at MUFG Union Bank.
In early Asian trade, 10-year U.S. Treasury yields dipped to their lowest in 3 years, while the 30-year yields (US30YT=RR) fell to as low as 1.991%, below the 2% floor for the Federal Reserve policy rate for the first time ever. A dip below 2% took the entire curve up to 30 years below official interest rates.
The U.S. stock futures (ESc1) managed to steady a little in Asian trading, erasing earlier losses.
Kerry Craig, a global markets strategist at J.P. Morgan Asset Management, said investors should also take note of how significantly markets had changed in the last decade, which meant a yield curve inversion might not be the harbinger it once was.
“Yield curve inversion is flashing a warning sign – investors should check their portfolios are resilient. But it’s not a reason to panic or to lean into the sell-off,” he said in a note.
Still, oil prices fell on Thursday to extend steep overnight losses as U.S. crude inventories unexpectedly rose, fears of recession mounted and economic data out of China and Europe disappointed. [O/R]. Yet gold prices remained stable on Thursday after rising on safe-haven buying in the previous trading session....Read more