US equities fell 3 per cent on Wednesday after disappointing data from China and Germany increased fears over global growth and bond markets signalled the chances of a recession were mounting.
The S&P 500 index finished down 2.9 per cent at its low point for the day, with energy stocks leading the declines, closely followed by financials. The tech-heavy Nasdaq was down just over 3 per cent.
Underscoring the rising concerns, the yields of US and UK 10-year government bond yields dipped below those of shorter-maturity debt for the first time since the financial crisis — an inversion of their normal relationship that has historically been a harbinger of recession and which crimps banks' profitability.
Underscoring the rising concerns, the yields of US and UK 10-year government bond yields dipped below those of shorter-maturity debt for the first time since the financial crisis — an inversion of their normal relationship that has historically been a harbinger of economic recessions.
"I think that the US economy has enough strength to avoid [a recession]. But the odds have clearly risen and they are higher than I'm frankly comfortable with," former Federal Reserve chair Janet Yellen told Fox Business.
Underscoring the 'flight to safety' that has hit markets lately, the 30-year US Treasury bond dropped 12 basis points to 2.04 per cent on Wednesday, its lowest ever level, while the US stock market was down 2.4 per cent by midday in New York.
This is a warning sign about the global slowdown
The FTSE All-World index that measures the health of global stock markets fell 1.6 per cent on Wednesday, and the universe of negative-yielding bonds has swelled to more than $15tn as investors gird themselves for more monetary easing from central banks.
Investor fears were further compounded by a raft of poor Chinese data and news that the German economy shrank in the three months through June. Peter Altmaier, German economy minister, said the country could avoid a recession but described the data as a "wake-up call and warning signal".
While the Trump administration this week delayed some new tariffs on consumer goods that were set to take effect next month, investors remained concerned that the escalating trade war is exacting a climbing toll on the global economy.
"It's a dangerous game," said Dan Ivascyn, chief investment officer at Pimco, the giant bond investment group. "We think some economic damage is dealt every day that this uncertainty lingers."
The US "yield curve inversion" — when long-term bond yields are lower than short-term one — was particularly unnerving to investors, given the global importance of the world's biggest economy.
A different part of the Treasury curve that compares three-month yields against 10-year yields had already inverted, but the shift in this area is the latest indication of growing unease in the fixed income market.
Typically longer-term debt trades with higher yields to compensate investors for the risk of holding debt for a longer time during which it is more difficult to predict economic conditions. When the yield curve flips, it is generally seen as a strong signal that investors are expecting an economic downturn.
"This is a warning sign about the global slowdown," said Andrea Iannelli, investment director at Fidelity International. "There's a lot priced in terms of bad news, but for now the momentum remains extremely strong."
"The recent escalation in US-China tensions reinforces our view that trade and geopolitical frictions have become the key driver of the global economy and markets," BlackRock, the world's biggest asset manager, said earlier this week.
Mike Riddell, a fund manager at Allianz Global Investors, cautioned that the UK yield curve was a less reliable recession indicator than its US counterpart. "The UK curve spent almost half the 1990s inverted and things were fine," he said.
Nonetheless, there is "no question that a curve that is flattening or inverting is increasing the chances of recession".
Written by: Robin Wigglesworth, Adam Samson and Tommy Stubbington
© Financial Times