Sharemarkets slumped on Friday as bond yields fell sharply to multi-year lows on fears the slowing pace of growth around the world could stall and produce a recession later this year or in early 2020.
Complicating matters for investors worldwide was the news that the special counsel Robert Mueller delivered his report Friday to the Justice Department on his investigation into Russian election meddling in the 2016 elections.
That could be destabilising as the recommendations emerge and President Trump fights any negative findings that cast doubt on his 2016 win.
Markets in the US and Europe fell – but China, Hong Kong, and China rose on Friday – confidence that will shatter today after the big sell-off on Friday night, our time.
The Australian market rose 28 points on Friday – ignoring the factory reports from Asia, but is now is heading for a 50 point fall at the opening later this morning.
Wall Street stocks sold off sharply on Friday, with the benchmark S&P 500 index falling nearly 2% as weak factory data from the United States and Europe led to an inversion of US Treasury yields, re-igniting fears of a global economic downturn.
It’s not the first time the US bond yield curve has inverted in the past couple of years (that’s when distant bond yields fall below shorter-dated securities).
There have been brief occasions where it happened in the middle of the yield curve, but Friday saw the first time for several years that the 10 year bond yield dipped under the then Federal Funds rate.
The Australian bond market saw yields on shorter-dated securities fall before the 1.50% cash rate on Friday (around 1.49% for 2 and 5-year bonds, according to Bloomberg data).
The three major Wall Street benchmarks had their biggest one-day drop since January 3 with the Dow slumping 460.19 points, or 1.8%, to 25,502.32. The S&P 500 index plunged 54.17 points, or 1.9%, to 2,800.71 and the Nasdaq Composite Index lost 196.29 points, or 2.5%, to 7,642.67.
For the week, the Dow fell 1.3%, the S&P 500 lost 0.8% and the Nasdaq dropped 0.6%. Europe’s Stoxx 600 index fell 1.2% on Friday and 2.1% over the week. The ASX 200 fell 0.3% but looks likely to see bigger falls this week.
Japanese shares rose 1.6%, Chinese shares rose 2.4% and Australian shares rose 0.3%, but US shares lost 0.8% and Eurozone shares fell 2.1% .
The combination of weak economic data and a very dovish Fed pushed bond yields sharply lower. While oil and gold prices rose, copper and iron ore prices fell and the $A fell slightly against a flat $US.
The pace of factory activity in the euro zone contracted at the fastest pace in nearly six years, raising fears of an imminent slowdown. In Japan, manufacturing output shrank the most in almost three years, hurt by slowdowns n China and South Korea.
And a measure of US manufacturing slid to its weakest since June 2017 while the Federal Reserve Bank of Philadelphia revealed its Factory Activity Index remained around three-year lows.
German 10-year bond yields, which fell after the Fed signaled no more rate hikes this year, dived again on Friday to fall below zero for the first time in well over a year (minus 0.011%). Yields on Japanese bonds also dipped to minus 0.07%
In New York, the yield on the 10-year Treasury bond slid to a 14-month low on slowing growth worries and weakening inflation expectations.
Economists pointed out that the 10 year yield dropped below the yields on all maturities of T-bills for the first time in 12 years, a so-called yield-curve inversion that is often an early warning alert of a recession.
“While such an inversion has traditionally been an indicator of a recession, this time around it may be less about the prospects for the U.S. economy and more about spillovers from what is happening in Europe and the bond market there, together with the effects of the Fed’s surprising decision to be very dovish again with its unconventional policy tools,” said Mohamed El-Erian, chief economic adviser at Allianz in Newport Beach, California told Reuters.
This sort of inversion where the 10-year yield dips under the Fed Funds Rate (rather than a different sort where yields on two to five-year bonds fall before the Federal Funds Rate) is seen as a warning of a recession in about a year’s time.
But there have been occasions in the past couple of years when the yield curve has inverted and nothing has happened. It can be an indicator, and it can be just a warning signal that is overtaken by something else such as the Trump tax cuts and a rebound in oil prices in 2017 and 2018.
The Federal Funds rate is 2.25% to 2.50% after last week’s Fed meeting while the yield on 10-year bonds ended at 2.442%.
In Australia the signal was less obvious – the 10-year yield ended at 1.83%, the lowest since 2017, while the yields on two and five-year bonds fell to 1.49% against the cash rate of 1.5%.
The AMP’s Chief Economist, Dr. Shane Oliver wrote at the weekend “Friday’s falls in US and Eurozone shares, weak global PMIs, the risks around flattening/inverted yield curves and ongoing trade risks do highlight the significant risk of a correction in share markets after their deep V rebound from December lows.”
But he sees economic growth recovering in the second half of this year, so the signals being sent by the inversion look temporary and more to do with the slowdown in Europe and the trade tensions with China.
