Specialist Mario Picone works on the floor of the New York Stock Exchange on Wednesday. Photo / AP
New Zealand's share market fell by 1.15 per cent this morning after Wall Street tumbled amid fears of an economic recession in the US.
Wall Street's Dow Jones Index fell by 800 points, or 3 per cent cent, in the wake of the US bond curve turning negative for the first time in a decade.
The so-called inversion has correctly predicted many past recessions and is the loudest warning bell yet about a possible recession ahead.
The 3 per cent fall was Wall Street's biggest one-day fall so far this year.
New Zealand's share market reacted by dropping by 1.15 per cent in the opening minutes of trade.
By 10.05 am the S&P/NZX50 index was down by 125 points at 10,725 following on from a 3 per cent decline in the Dow Jones index.
"The market has held up better than Wall Street, which is often the case," Mark Lister, head of private wealth research at Craigs Investment Partners said.
Prices were weaker across the board, with the biggest moves in the "growth" stocks, he said.
The 10-year Treasury bond yield fell below 1.6 per cent, dropping just below the yield of the 2-year Treasury bond, as nervousness mounted about the state of the world economy following news that the German economy - Europe's biggest - shrank in the second quarter.
Worsening US-China trade relations was cited as another factor, as was news that China's industrial production grew at the weakest rate in 17 years last month.
Harbour Asset Management portfolio manager Shane Solly said Wall Street's sharp decline would take some confidence out of the local market.
He said the New Zealand reporting season to date had been progressing well and the numbers to date been "ok".
"But it is volatile and this is telling us that there is a degree of uncertainty around how trade negotiations are going to unwind," he said.
Solly said it now appeared that the reasons why central banks here and around the world had opted to cut official rates - such as lower world economic growth - were starting to surface.
However, the New Zealand sharemarket, with its high proportion of defensive-style, dividend-yield stocks, would offer investors a degree of protection from big swings on overseas markets, he said.
Volatility has returned to the markets in August amid rising tensions in the trade dispute between the US and China. The S&P 500 is down more than 4 per cent as investors fear a prolonged trade dispute could further weaken the global economy.
Traders tend to plough money into ultra-safe US government bonds when they're fearful of an economic slowdown, and that sends yields lower. When long-term yields fall enough, market watchers see it as a prediction that a recession could be on the way in a year or two. The yield on the 10-year Treasury has dropped from 2.02 per cent on July 31 to below 1.60 per cent. The 30-year Treasury yield also hit a record low Wednesday.
Economic data from two of the world's biggest economies added to investors' fears. European markets fell after Germany's economy contracted 0.1 per cent in the spring due to the global trade war and troubles in the auto industry. In China, the world's second-largest economy, growth in factory output, retail spending and investment weakened in July.
"The bad news for global economies is stacking up much faster than most economists thought, so trying to keep up is exhausting," Kevin Giddis, head of fixed income capital markets at Raymond James, wrote in a report.
The S&P 500 fell 2.7 per cent, as of 3pm Eastern time, giving back all of the prior day's jump, which came after the US delayed some of the tariffs threatened on Chinese imports.
The Dow sank 720 points, or 2.7 per cent, to 25,559. The Nasdaq composite index lost 2.8 per cent, while the Russell 2000 index of smaller company stocks lost 2.9 per cent.
The losses come a day after stocks rallied when the Trump administration delayed tariffs on about US$160 billion in Chinese goods that were set to take effect on September 1.
While the market was falling Wednesday, President Donald Trump took to Twitter to again criticise the Federal Reserve for hampering the US economy by raising rates "far too quickly" last year and not reversing its policy aggressively enough — the Fed cut its key rate by a quarter point last month. He also defended his trade policy, even though investors remain worried that the trade war between the world's two largest economies may drag on through the 2020 US election and cause more economic damage.
..Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back. We will Win!
— Donald J. Trump (@realDonaldTrump) August 14, 2019
"We still see a substantial risk that the trade dispute will escalate further," said Mark Haefele, global chief investment officer at UBS in a note to clients.
With bond yields falling, banks took heavy losses Wednesday. Lower bond yields are bad for banks because they force interest rates on mortgages and other loans lower, which results in lower profits for banks. Citigroup sank 5.1 per cent and Bank of America gave up 5 per cent.
Much of the market's focus was on the US yield curve, which has historically been one of the more reliable recession indicators. After briefly trading below the yield on the two-year Treasury earlier Wednesday, the yield on the 10-year Treasury was 1.58 per cent in afternoon trading, even with the yield on the two-year.
Other parts of the yield curve have already inverted, beginning late last year. But each time, some market watchers cautioned not to make too much of it. Academics tend to pay the most attention to the spread between the three-month Treasury and the 10-year Treasury, which inverted in the spring. Traders often pay more attention to the two-year and 10-year spread.
Each of the last five times the two-year and 10-year Treasury yields have inverted, a recession has followed. The average amount of time is around 22 months, according to Raymond James' Giddis. The last inversion of this part of the yield curve began in December 2005, two years before the Great Recession tore through the global economy.
The indicator isn't perfect, though, and it's given false signals in the past. Some market watchers also say the yield curve may be a less reliable indicator this time because technical factors may be distorting longer-term yields, such as negative bond yields abroad and the Federal Reserve's holdings of $3.8 trillion in Treasurys and other investments on its balance sheet.
Macy's plunged 11.4 per cent, the sharpest loss in the S&P 500, after it slashed its profit forecast for the year. The retailer's profit for the latest quarter fell far short of analysts' forecasts as it was forced to slash prices on unsold merchandise. The grim results from Macy's sent other retailers sharply lower, too. Nordstrom sank 10 per cent and Kohl's dropped 11 per cent.
Energy stocks also sank sharply, hurt by another drop in the price of crude oil on worries that a weakening global economy will drag down demand. National Oilwell Varco slumped 7.4 per cent and Schlumberger skidded 6.5 per cent. The price of benchmark US crude slid 3.9 per cent to $54.88 per barrel. Brent crude, the international standard, lost 3.7 per cent to $59.04.
Gold gained $13.70 to $1,515.90 per ounce, close to a six-year high. Investors also bid up shares in mining company Newmont Goldcorp 1.8 per cent.
Overseas, Germany's DAX dropped 2.3 per cent following the weak German economic data. France's CAC 40 fell 2.2 per cent, and the FTSE 100 in London lost 1.7 per cent.
In Asia, Japan's Nikkei 225 rose 1 per cent, the Kospi in South Korea gained 0.7 per cent and the Hang Seng in Hong Kong added 0.1 per cent.
- additional AP
'The inclination is not to do too much,' Forsyth Barr analyst Peter Sigley said.