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Dow tumbles 700 points as US and UK yield curves invert, and German recession looms – business live Dow tumbles 700 points as US and UK yield curves invert, and German recession looms – business live
(32 minutes later)
Update: Wall Street is refusing to shake off its gloom, and is actually hitting new lows.
With barely an hour’s trading to go, the Dow is down an alarming 763 points, or 2.9%, at 25,515 points.
Are you sitting comfortably? Then here’s a short story about the problem
Recessions and the yield curve; all you'll ever need to know. I post this parable every year or so, so it would be remiss not to roll it out today of all days. pic.twitter.com/2PCDrblltd
Time for a recapTime for a recap
Stocks have plunged on both sides of the Atlantic as fears grow that America could fall into recession, dragged down by a global slowdown and the trade war with China.Stocks have plunged on both sides of the Atlantic as fears grow that America could fall into recession, dragged down by a global slowdown and the trade war with China.
On Wall Street, the main share indices have lost at least 2.5% as a big wave of selling rips through the markets. The Dow Jones industrial average lost more than 700 points at one stage, with banks, tech stocks and industrial companies suffering sharp falls.On Wall Street, the main share indices have lost at least 2.5% as a big wave of selling rips through the markets. The Dow Jones industrial average lost more than 700 points at one stage, with banks, tech stocks and industrial companies suffering sharp falls.
In London, the FTSE 100 tumbled by more than 103 points, hitting its lowest closing level since March.In London, the FTSE 100 tumbled by more than 103 points, hitting its lowest closing level since March.
The selloff was sparked by alarm that both the US and UK government bond yields inverted today, as bond prices soared. That means that traders are accepting a lower interest rate to hold longer-dated bonds than the shorter-dated alternative.The selloff was sparked by alarm that both the US and UK government bond yields inverted today, as bond prices soared. That means that traders are accepting a lower interest rate to hold longer-dated bonds than the shorter-dated alternative.
An inverted yield curve is an unusual situation that typically only happens before a recession, at least in America. It’s a classic warning light, which has flashed ominously brightly today.An inverted yield curve is an unusual situation that typically only happens before a recession, at least in America. It’s a classic warning light, which has flashed ominously brightly today.
However, some experts - including former top central banker Janet Yellen - believe that a recession can be avoided. They believe the bond market is predicting low growth in the future, but hopefully not a full-blown downturn.However, some experts - including former top central banker Janet Yellen - believe that a recession can be avoided. They believe the bond market is predicting low growth in the future, but hopefully not a full-blown downturn.
The White House has responded by renewing its call for US interest rate cuts soon. President Trump claimed the Fed had made two huge mistakes, while trade advisor Peter Navarro predicted borrowing costs would be slashed in the coming months.The White House has responded by renewing its call for US interest rate cuts soon. President Trump claimed the Fed had made two huge mistakes, while trade advisor Peter Navarro predicted borrowing costs would be slashed in the coming months.
Traders were also alarmed by new data showing that Germany’s economy shrank by 0.1% in the second quarter of 2019. Germany joined the UK and Sweden as the worst-performing EU members, as eurozone growth halved to 0.2%.Traders were also alarmed by new data showing that Germany’s economy shrank by 0.1% in the second quarter of 2019. Germany joined the UK and Sweden as the worst-performing EU members, as eurozone growth halved to 0.2%.
Germany’s economy suffered from a slump in exports, due to trade war tensions. Economists believe that Berlin should boost government spending quickly, to prop up growth. Otherwise, Europe’s largest economy could soon fall into recession.Germany’s economy suffered from a slump in exports, due to trade war tensions. Economists believe that Berlin should boost government spending quickly, to prop up growth. Otherwise, Europe’s largest economy could soon fall into recession.
Newsflash: President Donald Trump has launched another salvo at Federal Reserve chair Jerome Powell.Newsflash: President Donald Trump has launched another salvo at Federal Reserve chair Jerome Powell.
Trump is unhappy with the way Powell presented last month’s interest rate cut, and (as usual) is pushing the Fed for more aggressive cuts.Trump is unhappy with the way Powell presented last month’s interest rate cut, and (as usual) is pushing the Fed for more aggressive cuts.
The Great Charles Payne @cvpayne correctly stated that Fed Chair Jay Powell made TWO enormous mistakes. 1. When he said “mid cycle adjustment.” 2. We’re data dependent. “He did not do the right thing.” I agree (to put it mildly!). @VarneycoThe Great Charles Payne @cvpayne correctly stated that Fed Chair Jay Powell made TWO enormous mistakes. 1. When he said “mid cycle adjustment.” 2. We’re data dependent. “He did not do the right thing.” I agree (to put it mildly!). @Varneyco
Given the torrent of criticism from Trump, Powell may feel his first mistake was accepting the offer to run the Fed at all!Given the torrent of criticism from Trump, Powell may feel his first mistake was accepting the offer to run the Fed at all!
The president has also appeared to welcome the plunge in US bond yields today, caused by a dash to buy Treasury bills.The president has also appeared to welcome the plunge in US bond yields today, caused by a dash to buy Treasury bills.
Tremendous amounts of money pouring into the United States. People want safety!Tremendous amounts of money pouring into the United States. People want safety!
Attention traders!Attention traders!
Former Federal Reserve Chairman Janet Yellen believes the markets may be wrong in assuming that the inverted US yield curve is signalling a recession.Former Federal Reserve Chairman Janet Yellen believes the markets may be wrong in assuming that the inverted US yield curve is signalling a recession.
Speaking on Fox Business, Yellen said that this time things are different....Speaking on Fox Business, Yellen said that this time things are different....
Historically, it has been a pretty good signal of recession, and it think that’s when markets pay attention to it, but I would really urge that on this occasion it may be a less good signal.Historically, it has been a pretty good signal of recession, and it think that’s when markets pay attention to it, but I would really urge that on this occasion it may be a less good signal.
The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.”The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.”
Yellen also believes that America will avoid a recession, but revealed she is becoming more concerned:Yellen also believes that America will avoid a recession, but revealed she is becoming more concerned:
I think the U.S. economy has enough strength to avoid that, but the odds have clearly risen and their higher than I’m frankly comfortable with.”I think the U.S. economy has enough strength to avoid that, but the odds have clearly risen and their higher than I’m frankly comfortable with.”
Ouch! The Dow Jones industrial average has now lost more than 700 points, as Wall Street traders continue hammering their sell buttons.Ouch! The Dow Jones industrial average has now lost more than 700 points, as Wall Street traders continue hammering their sell buttons.
The benchmark index is now down 2.7% at 25,561.The benchmark index is now down 2.7% at 25,561.
Each of the 30 companies on the Dow is in the red, with the mining sector shedding 4.4%, banks down 3.6% and energy firms down 3.2%.Each of the 30 companies on the Dow is in the red, with the mining sector shedding 4.4%, banks down 3.6% and energy firms down 3.2%.
The broader S&P 500 index has also lost 2.7%, while the Nasdaw is down 3% as tech stocks are pummelled.The broader S&P 500 index has also lost 2.7%, while the Nasdaw is down 3% as tech stocks are pummelled.
Recession fears are flooding over the trading floors, even though several economists have cautioned against panicking over the inverted US yield curve.Recession fears are flooding over the trading floors, even though several economists have cautioned against panicking over the inverted US yield curve.
As David Madden of CMC Markets puts it:As David Madden of CMC Markets puts it:
The inversion of the US 2 year yield and the US 10 year yield has sent shockwaves through the markets, and that has forewarned recessions in the US, and traders are running scared.The inversion of the US 2 year yield and the US 10 year yield has sent shockwaves through the markets, and that has forewarned recessions in the US, and traders are running scared.
The major indices sold-off sharply for fear the US is heading for a recession. The underlying fundamentals are solid as the jobless rate is at multi-decade lows, and average earnings are outstripping inflation, but for now dealers are focusing on the yield curve, and equities are taking a hammering.The major indices sold-off sharply for fear the US is heading for a recession. The underlying fundamentals are solid as the jobless rate is at multi-decade lows, and average earnings are outstripping inflation, but for now dealers are focusing on the yield curve, and equities are taking a hammering.
Economics expert Duncan Weldon has written a interesting thread about today’s bond market developments.Economics expert Duncan Weldon has written a interesting thread about today’s bond market developments.
He argues that the slump in bond yields shows anxiety about growth prospects, but not necessarily a recession.He argues that the slump in bond yields shows anxiety about growth prospects, but not necessarily a recession.
Why? Because previous recessions have often been caused by rising interest rates (to cool inflation), while today’s central banks are likely to cut borrowing costs (where possible) to stimulate growth.Why? Because previous recessions have often been caused by rising interest rates (to cool inflation), while today’s central banks are likely to cut borrowing costs (where possible) to stimulate growth.
Will there be a UK/US recession now the yield curve has inverted? A mini-thread.Will there be a UK/US recession now the yield curve has inverted? A mini-thread.
First, an explainer.What’s a yield curve inversion?Well, it’s when the cost of government borrowing is lower for longer term borrowing than shorter term borrowing. I.e. when the yield on 2 Year government bonds is higher than on 10 year bonds.First, an explainer.What’s a yield curve inversion?Well, it’s when the cost of government borrowing is lower for longer term borrowing than shorter term borrowing. I.e. when the yield on 2 Year government bonds is higher than on 10 year bonds.
That *shouldn’t* happen often. Lending for longer should have a higher risk premium attached. A longer term loan is riskier. And *should* attract a higher yield.That *shouldn’t* happen often. Lending for longer should have a higher risk premium attached. A longer term loan is riskier. And *should* attract a higher yield.
But, “risk free” (let’s be honest - neither the UK nor the US likely to default!) rates aren’t really about credit risk. They are about market expectations of future central bank policy rates.But, “risk free” (let’s be honest - neither the UK nor the US likely to default!) rates aren’t really about credit risk. They are about market expectations of future central bank policy rates.
So UK & US government 2 year borrowing costs being below 10 year borrowing costs is seen as a recession indicator. It suggests that central banks will be cutting rates soon, and CBs do that when the economy turns down.So UK & US government 2 year borrowing costs being below 10 year borrowing costs is seen as a recession indicator. It suggests that central banks will be cutting rates soon, and CBs do that when the economy turns down.
Historically, US yield curve inversions (2 year government debt attracting a higher yield than 10 year) have *always* been followed by recession.Historically, US yield curve inversions (2 year government debt attracting a higher yield than 10 year) have *always* been followed by recession.
But, and the but is important here, they’ve usually been associated with rising short term interest rates not falling long term ones.But, and the but is important here, they’ve usually been associated with rising short term interest rates not falling long term ones.
And, in countries like Japan - which has experienced lownlong term rates for years, the curve has often inverted without a recession following.And, in countries like Japan - which has experienced lownlong term rates for years, the curve has often inverted without a recession following.
And, in countries like Japan - which has experienced lownlong term rates for years, the curve has often inverted without a recession following.And, in countries like Japan - which has experienced lownlong term rates for years, the curve has often inverted without a recession following.
And let’s be honest... thinking a yield curve inversion means a recession is odds on... puts a lot of faith in the predictive power of the bond market.And let’s be honest... thinking a yield curve inversion means a recession is odds on... puts a lot of faith in the predictive power of the bond market.
I think a better read of the current pricing is that investors in UK and US longer term bonds think that longer term growth prospects are weak. Not that a recession is imminent.I think a better read of the current pricing is that investors in UK and US longer term bonds think that longer term growth prospects are weak. Not that a recession is imminent.
Bloomberg’s Michael McDonough makes a good point – who will get the blame if America slides into recession?Bloomberg’s Michael McDonough makes a good point – who will get the blame if America slides into recession?
Many economists would point to the US–China trade war, which has disrupted the global economy and contributed to the slowdown.Many economists would point to the US–China trade war, which has disrupted the global economy and contributed to the slowdown.
President Trump, though, has already blamed the US Federal Reserve for raising interest rates too high (nine times since the financial crisis ended), and being too slow to respond (its first cut in a decade came last month)President Trump, though, has already blamed the US Federal Reserve for raising interest rates too high (nine times since the financial crisis ended), and being too slow to respond (its first cut in a decade came last month)
Recession Probability Measures: (If in the end there is a recession, triggered by an escalating trade war, will it be known as the "Trump recession" or will blame somehow be placed on the Fed? I imagine this would matter a lot ahead of 2020) pic.twitter.com/tw2VbLKX0SRecession Probability Measures: (If in the end there is a recession, triggered by an escalating trade war, will it be known as the "Trump recession" or will blame somehow be placed on the Fed? I imagine this would matter a lot ahead of 2020) pic.twitter.com/tw2VbLKX0S
The Fed’s next meeting is on September 17-18, where it could lower borrowing costs again.The Fed’s next meeting is on September 17-18, where it could lower borrowing costs again.
But Steen Jakobsen, chief economist & CIO at Saxo Bank, claims the Fed might have to unleash an emergency rate cut to calm the markets.But Steen Jakobsen, chief economist & CIO at Saxo Bank, claims the Fed might have to unleash an emergency rate cut to calm the markets.
He told clients today that the Fed is behind the curve:He told clients today that the Fed is behind the curve:
The only way to ‘move’ the market now in my opinion being moving [rates] between scheduled meetings.The only way to ‘move’ the market now in my opinion being moving [rates] between scheduled meetings.
They need to produce faster or more. Both are likely, but by faster would be my choice! Rip off the band aid.They need to produce faster or more. Both are likely, but by faster would be my choice! Rip off the band aid.
Here’s a video clip of White House trade adviser Peter Navarro predicting hefty cuts to US interest rates this autumn:Here’s a video clip of White House trade adviser Peter Navarro predicting hefty cuts to US interest rates this autumn:
#NEW Peter Navarro says interest rates most likely to be cut 50 bases points in September and 25 in December [toatl of 75 and maybe in reverse order]Also, @realDonaldTrump to remove certain tariffs for the holiday season. pic.twitter.com/eZ6gZmxB4C#NEW Peter Navarro says interest rates most likely to be cut 50 bases points in September and 25 in December [toatl of 75 and maybe in reverse order]Also, @realDonaldTrump to remove certain tariffs for the holiday season. pic.twitter.com/eZ6gZmxB4C
Wall Street is showing a distinct reluctance to bounce.Wall Street is showing a distinct reluctance to bounce.
Stocks are ploughing new lows, with the Dow now down 660 points or 2.5%.Stocks are ploughing new lows, with the Dow now down 660 points or 2.5%.
Dow tumbles more than 660 points or 2.5% to fresh session low; Nasdaq falls nearly 3% https://t.co/JdC6tKkvoU pic.twitter.com/JXXUSYvvH5Dow tumbles more than 660 points or 2.5% to fresh session low; Nasdaq falls nearly 3% https://t.co/JdC6tKkvoU pic.twitter.com/JXXUSYvvH5
Today has seen investors scramble desperately into safe-haven assets, such as government bonds and gold, and out of the risky stuff including oil and shares. Today investors have scrambled desperately into safe-haven assets, such as government bonds and gold, and out of the risky stuff including oil and shares.
That’s driven bond yields to record lows (Germany’s benchmark 10-year bund fell deeper into negative yield territory), and pushed stock markets to their weakest point in several months.That’s driven bond yields to record lows (Germany’s benchmark 10-year bund fell deeper into negative yield territory), and pushed stock markets to their weakest point in several months.
It’s all doom and gloom in the bond markets as investors flee into safe-haven assets. pic.twitter.com/bHp8Xp3u1aIt’s all doom and gloom in the bond markets as investors flee into safe-haven assets. pic.twitter.com/bHp8Xp3u1a
European stock markets have hit their lowest level in six months:European stock markets have hit their lowest level in six months:
European equities smoked today:European Closing Prices:#FTSE 7147.88 -1.42%#DAX 11492.66 -2.19%#CAC 5251.3 -2.08%#MIB 20020.28 -2.53%#IBEX 8522.7 -1.98%European equities smoked today:European Closing Prices:#FTSE 7147.88 -1.42%#DAX 11492.66 -2.19%#CAC 5251.3 -2.08%#MIB 20020.28 -2.53%#IBEX 8522.7 -1.98%
Newsflash: Britain’s FTSE 100 stock index has just closed, down 103 points at 7,147.Newsflash: Britain’s FTSE 100 stock index has just closed, down 103 points at 7,147.
That’s its lowest closing level since March this year, and means the index has lost over 400 points since the start of August.That’s its lowest closing level since March this year, and means the index has lost over 400 points since the start of August.
Engineering firm Melrose was the top faller, down 5.75%, followed by mining group Evraz (-5.2%). Holiday group TUI and airline group IAG, which would also suffer in a recession, lost 4.3%.Engineering firm Melrose was the top faller, down 5.75%, followed by mining group Evraz (-5.2%). Holiday group TUI and airline group IAG, which would also suffer in a recession, lost 4.3%.
In the City, the FTSE 100 is being dragged lower and lower too.In the City, the FTSE 100 is being dragged lower and lower too.
The index of top London-listed shares has now lost 134 points, or 1.85%, falling to 7,116 points. That’s its lowest in over two months.The index of top London-listed shares has now lost 134 points, or 1.85%, falling to 7,116 points. That’s its lowest in over two months.
Fiona Cincotta, senior analyst at City Index.co.uk, says fears of a global downturn are stalking the markets:Fiona Cincotta, senior analyst at City Index.co.uk, says fears of a global downturn are stalking the markets:
Doom and gloom dominated after data showed that Chinese industrial output grew at the slowest pace in 17 years, whilst the German economy contracted.Doom and gloom dominated after data showed that Chinese industrial output grew at the slowest pace in 17 years, whilst the German economy contracted.
Recession warning bells rang out across the markets as Trump’s delaying of tariffs on some Chinese imports is a case of too little too latte – the damage to economies has already been done.Recession warning bells rang out across the markets as Trump’s delaying of tariffs on some Chinese imports is a case of too little too latte – the damage to economies has already been done.
Ouch! The Dow has now slumped deeper into the red, down 2.25% or 591 points at 25,688.Ouch! The Dow has now slumped deeper into the red, down 2.25% or 591 points at 25,688.
Major US indices are hitting new daily lows as the 10yr-2yr yield curve inversion has investors spooked: #DJIA -591, #SPX -65Major US indices are hitting new daily lows as the 10yr-2yr yield curve inversion has investors spooked: #DJIA -591, #SPX -65
Here’s a reminder that inverted yield curves don’t IMMEDIATELY lead to recessions; it can take a year or more.Here’s a reminder that inverted yield curves don’t IMMEDIATELY lead to recessions; it can take a year or more.
Some historical context for inversions and recessions https://t.co/bnju2XDr98 pic.twitter.com/vX66R9zPRzSome historical context for inversions and recessions https://t.co/bnju2XDr98 pic.twitter.com/vX66R9zPRz
Investors have been snapping up long-term US government debt today, sending the yield (interest rate) on 30-year Treasury bills to record lows (meaning prices are at record highs).Investors have been snapping up long-term US government debt today, sending the yield (interest rate) on 30-year Treasury bills to record lows (meaning prices are at record highs).
As Treasury yields continue to move lower, the 30-Year Treasury yield declined to a record low today. #treasuryyield #recordlow #flighttosafety pic.twitter.com/eWgAuYpNI5As Treasury yields continue to move lower, the 30-Year Treasury yield declined to a record low today. #treasuryyield #recordlow #flighttosafety pic.twitter.com/eWgAuYpNI5
A US recession may be approaching, but it might not actually arrive for a couple of years.A US recession may be approaching, but it might not actually arrive for a couple of years.
So argues Seema Shah, chief strategist at Principal Global Investors, who predicts the downturn could be delayed until 2021, if central bankers take action.So argues Seema Shah, chief strategist at Principal Global Investors, who predicts the downturn could be delayed until 2021, if central bankers take action.
She writes:She writes:
“The US economy is clearly weakening and risks are piling up. Capex will inevitably slow further, but under the assumption that the trade war doesn’t escalate further, it will not weaken so much as to tip the US into recession. The Fed pivot in early 2019, global central bank easing, China stimulus and the reversal of its deleveraging process will support the global economy. Certainly our own recession risk model suggests that while the probability of a US recession has increased, it still isn’t our central scenario.“The US economy is clearly weakening and risks are piling up. Capex will inevitably slow further, but under the assumption that the trade war doesn’t escalate further, it will not weaken so much as to tip the US into recession. The Fed pivot in early 2019, global central bank easing, China stimulus and the reversal of its deleveraging process will support the global economy. Certainly our own recession risk model suggests that while the probability of a US recession has increased, it still isn’t our central scenario.
“Notably the historical success of the yield curve as a recessionary signal is too strong to dismiss. However, the lead time of its signalling can be several years, so it is our best bet that while recession is unlikely in 2020, the following year may be a fairer bet as concerns about leverage in the corporate debt maker start to come to the fore. Even so, there are certainly enough risks globally to prompt investors to take reasonable defensive positioning in their portfolios right now.“Notably the historical success of the yield curve as a recessionary signal is too strong to dismiss. However, the lead time of its signalling can be several years, so it is our best bet that while recession is unlikely in 2020, the following year may be a fairer bet as concerns about leverage in the corporate debt maker start to come to the fore. Even so, there are certainly enough risks globally to prompt investors to take reasonable defensive positioning in their portfolios right now.
Mohamed A. El-Erian, chief economic adviser at Allianz, says this morning’s weak German GDP report has helped to drive bond yields down today.Mohamed A. El-Erian, chief economic adviser at Allianz, says this morning’s weak German GDP report has helped to drive bond yields down today.
He also cites poor Chinese industrial data released overnight, showing the smallest rise in factory output since 2002 -- another sign of economic slowdown.He also cites poor Chinese industrial data released overnight, showing the smallest rise in factory output since 2002 -- another sign of economic slowdown.
Again this morning, lots of talk in #markets about government #bond yields as2-10 curves invert in the UK and US (chart);New record low for the US long bond;The 10-year US yield falls to 1.60% and Germany to minus 0.64%; andThe stock of negative-yielding bonds reaches $16 tr. pic.twitter.com/eRuilPtja7Again this morning, lots of talk in #markets about government #bond yields as2-10 curves invert in the UK and US (chart);New record low for the US long bond;The 10-year US yield falls to 1.60% and Germany to minus 0.64%; andThe stock of negative-yielding bonds reaches $16 tr. pic.twitter.com/eRuilPtja7
These yield moves reflect in part yet another set of weak economic data out of #China and #Germany. The dynamism of #IndustrialProduction in China is the most muted for 17 years; #Retailsales there also disappointed; and The German #economy contracted in the last quarter. pic.twitter.com/abW4WO2jCPThese yield moves reflect in part yet another set of weak economic data out of #China and #Germany. The dynamism of #IndustrialProduction in China is the most muted for 17 years; #Retailsales there also disappointed; and The German #economy contracted in the last quarter. pic.twitter.com/abW4WO2jCP