Wall Street was sold off heavily on Tuesday night, and with the markets closed tonight as a mark of respect to the late George H.W. Bush, the next two days are going to be fraught with tension for global investors without a lead from the US.
The 800 point loss for the Dow on Tuesday was the largest in seven weeks and came as US bond market rates continued to fall – in the face of the wide expectation that the Fed will lift interest rates at its meeting in two weeks time.
The Dow fell 799.36 points, or 3.1%, to close at 25,027. The S&P 500 slid 3.2% to end at 2,700, while the Nasdaq Composite dropped 3.8% to 7,158, and back into correction territory.
The sell-off left the ASX 200 looking at a 75 point loss at the opening on Wednesday, after Tuesday’s 58 loss and Monday’s 104 point gain which now looks an optimistic oddity.
All three main stock benchmarks, in fact, had their worst days since October 10, the day after US bond yields peaked at just over 3.25% for the key 10 year security.
Yesterday’s sell-off was an enormous turnaround from Monday’s 287 rise in the Dow (the index had been up 500 points in futures trading) after President Donald Trump and China’s leader Xi Jinping appeared to strike three month truce in trade hostilities on the sidelines of the Group of 20 summit in Argentina at the weekend.
Since then both the Trump administration and China have given conflicting views about what was agreed to, and investors are starting to wonder if the ceasefire is just that and hostilities will be resumed next February-March or even sooner.
But the big fear is the way the yield curve on US bonds has flattened (that is the difference between the yield on 2 year bonds versus yields on five and 10 year and 30 year bonds. Parts of the curve have already inverted (that’s where the longer dated bond’s yield is lower than the shorter dated security).
The yield on the benchmark two year bond fell to 2.80%, the 10-year bond fell 8.6 basis points — the most in over a month — to hit a three-month low of 2.8830% in early afternoon trade (it finished around 2.91%, down from 2.97% at the close on Monday) The 30-year bond yield fell 12.56 bps to 3.1278%. It finished at 3.17%.
The drop is the most since May and ranks as among one of the biggest on record. Expectations that the Federal Reserve will lift rates by another quarter point later this month has kept a lid on the rally in short-dated Treasuries, though, with yield falling just 2.6 bps to 2.80 per cent.
That difference, or spread is the tightest since 2007 at just over 10 basis points (it was 18 points on Monday). The flattening of the curve and the spread between the short-dated and longer-dated bonds, is usually a sign that investors have grown more wary about the outlook for the economy, or for a significant, negative political even in the near future.
In this case it’s the possible worsening of the trade war, the growing fears of political instability around President Trump in 2019 as all those investigations start coming together, and a growing belief that the Fed should not be pushing rates any higher after this month’s meeting because of weakening areas in the economy – such as in homebuilding.
The sharp rally in the bond market weighed heavily on banking stocks which helped the wider stock market lower. The sell-off, which picked gathered pace in the closing hour of trading left the S&P 500 nursing its biggest one-day drop in two months.
The inverting yield curve hit banks while tech stocks were hit by the China trade war fears. They led the market lower, but industrials emerged late as the worst performers with a 4.3% drop. Techs lost 4%, financials (including banks) lost 3.9%. The inverting and flattening yield curve is a signal also that bank profits will come under pressure as it narrows their profit margins.
