Yield Curve Panic: Bond Signals Send Shares Into Tailspin

By Glenn Dyer | More Articles by Glenn Dyer

Wall Street sold off heavily on Wednesday – closing down almost 3% and at the day’s lows after disappointing economic data in China and Germany triggered another round of a flight to quality by investors worried that bond markets signals that recession chances are becoming more pronounced.

It was the worst trading day on Wall Street for 2019 and stockmarkets in Asia, led by Australia will feel the first impact of that huge sell off.

The S&P 500 index finished down 2.93% with energy stocks leading the declines, closely followed by financials. The tech-heavy Nasdaq lost just over 3% while the Dow lost more than 3% or over 800 points.

The Australian market will start with a fall of around 2% after a 128 point slump on the overnight share price futures contract. The Aussie dollar ended around 67.50 – which was a good result seeing the tumult elsewhere.

Gold hit new six year highs, ending around $US1,527 an ounce – which will see local gold stocks resist the pressures to sell today.

Oil prices slumped down 3.7% for West Texas Intermediate to $US54.93 a barrel. Brent crude also closed lower – this time well under $US60 a barrel at $US59.08.

Driving the sell off and lower commodity prices was the increasing gloom about global growth.

Investors think the prospects for a global slowdown increased yesterday when preliminary estimates revealed a shock 0.1% fall in German economic growth in the three months to June and key Chinese data slowed more sharply than expected, with industrial production hitting a 17 year low in July.

The German economy shrank in the three months to June as trade tensions triggered by Donald Trump’s trade war with China hit its export-heavy manufacturing sector.

China’s industrial sector lifted output by 4.8% in July – down sharply from the 6.3% jump in June (which was stronger than expected). It was the lowest monthly reading since 2002 – that was well before the country’s economic boom accelerated and the resources boom altered the Australian economy and political and social life forever.

Germany’s output fell 0.1% in the June quarter from the previous three months, when growth grew 0.4%. For the year to June the annual growth rate slowed to 0.4% from, 0.7% in the March quarter.

The yield on Germany’s 10 year bond yield again slide to minus 0.65% while the yield on Japanese 10 year bonds dipped to minus 0.23%.

The German data underlines how the largest economy in Europe’s has gone from being the powerhouse of the region to lead weight in the saddle.

The Financial Times reported on Wednesday night that global bond markets have started signalling that a recession is near for the US and UK economies.

“Global bond markets have flashed an ominous signal for two of the world’s biggest economies amid mounting concern over a slowdown in growth and persistent uncertainty caused by the US-China trade battle,“ the paper reported.

“The spread of key interest rates in the US and UK over different time spans has inverted with yields on longer-term debt falling below shorter-term bonds, a move often seen by investors in the past as potential harbingers of economic downturns and recessions.

America’s 10-year Treasury yield dropped 1 basis point (0.01 percentage point) below that of the 2-year, according to Tradeweb data. It marked the first time this has occurred since the lead-up to the 2008-09 recession.

The yield on the 10 year note dipped to 1.61% against the 2 year yield of 1.62%. The 10 year yield closed at 1.62%, the same as the closing yield for 2 year paper. The 10 year yield was under yields on short dated paper three (1.94%), six (1.8%) and 12 month duration (1.78%).

With the Federal Funds rate at 2%-2.25% the inversion in the US yield curve is no pronounced and investors are increasingly concerned that the recession looms message is taking hold.

Australian 10 year bonds remained under the Reserve Bank’s 1% cash rate for another day yesterday at 0,94%, up from the record low of 0.93% on Tuesday.

The Australian five year bond yield of 0.67% is lower than the two year yield of 0.72%, hinting at growing unease among investors about the future health of the Australian economy.

The fact that the 10 year yield has been below the cash rate for the past five trading days indicates that unease is starting to sink in.

The weak wages data for the June quarter and 2018-19 tells us there is no prospect for any significant improvement in household demand and that the faith placed in tax refunds by the government and RBA is starting to look misplaced.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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