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| Markets slide as Germany faces recession, and US and UK yield curves invert – business live | Markets slide as Germany faces recession, and US and UK yield curves invert – business live |
| (32 minutes later) | |
| 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. | |
| 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. | |
| 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. | |
| Major 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. | |
| Some 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/eWgAuYpNI5 | As 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/eRuilPtja7 | 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/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/abW4WO2jCP | 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/abW4WO2jCP |
| Most of the big names on the Dow Jones industrial average are also in the red, haunted by recession worries. | Most of the big names on the Dow Jones industrial average are also in the red, haunted by recession worries. |
| Pharmaceutical firm WalGreens Boots Alliance is the top faller, down 3.2%, followed by chemicals firm Dow Inc (-3%), financial giant Goldman Sachs (-2.8%) and entertainment group Walt Disney (-2.75%). | Pharmaceutical firm WalGreens Boots Alliance is the top faller, down 3.2%, followed by chemicals firm Dow Inc (-3%), financial giant Goldman Sachs (-2.8%) and entertainment group Walt Disney (-2.75%). |
| This is keeping the DJIA down 1.5%, or 400-ish points, at 25,881. | This is keeping the DJIA down 1.5%, or 400-ish points, at 25,881. |
| Technology stocks are being hit hard now, sending the Nasdaq index down by 2%, or 150 points at 7,577. | Technology stocks are being hit hard now, sending the Nasdaq index down by 2%, or 150 points at 7,577. |
| Virtually every stock on the Nasdaq is in the red, with chipmakers AMD (-4.5%) and Micron (-3.3%) among the fallers. | Virtually every stock on the Nasdaq is in the red, with chipmakers AMD (-4.5%) and Micron (-3.3%) among the fallers. |
| Newsflash: Donald Trump’s trade adviser has said the slump in US bond yields proves that American interest rates should be cut. | |
| Peter Navarro also told Fox News that the “biggest problem” which America is currently fighting is the Federal Reserve’s interest rate policy. | |
| So much for central bank independence.... | So much for central bank independence.... |
| But yes, today’s selloff will pile more pressure on the Fed to cut rates at its September meeting, having already made its first cut in a decade in July. | But yes, today’s selloff will pile more pressure on the Fed to cut rates at its September meeting, having already made its first cut in a decade in July. |
| WHITE HOUSE ADVISER NAVARRO SAYS FALLING BOND YIELDS IS ANOTHER SIGN THAT U.S. FED SHOULD CUT INTEREST RATES | WHITE HOUSE ADVISER NAVARRO SAYS FALLING BOND YIELDS IS ANOTHER SIGN THAT U.S. FED SHOULD CUT INTEREST RATES |
| Trump has repeatedly criticised the Fed chair Jerome Powell for not cutting rates faster, so he could weigh in too. | |
| However, the president is currently more focused on curveballs than yield curve, judging by his latest tweet.... | However, the president is currently more focused on curveballs than yield curve, judging by his latest tweet.... |
| A fighter and champion, GREAT! https://t.co/8LoTrb6Pdc | A fighter and champion, GREAT! https://t.co/8LoTrb6Pdc |
| Newsflash: Stocks are sliding at the start of trading in New York, as investors fear that an American recession could be looming | |
| In early trading.... | In early trading.... |
| Dow Jones industrial average: down 425 points or 1.6% at 25,854 | Dow Jones industrial average: down 425 points or 1.6% at 25,854 |
| S&P 500: Down 44 points or 1.5% at 2,881 | S&P 500: Down 44 points or 1.5% at 2,881 |
| Nasdaq: Down 138 points or 1.7% at 7,878 | Nasdaq: Down 138 points or 1.7% at 7,878 |
| Technology stocks and banks are among the fallers, as traders shun risky assets. Bank of America has shed almost 3%, while Apple has lost 2.3%. | Technology stocks and banks are among the fallers, as traders shun risky assets. Bank of America has shed almost 3%, while Apple has lost 2.3%. |
| The inversion of America’s government bond yield curve today has clearly worried Wall Street, given its track record of predicting recessions. | The inversion of America’s government bond yield curve today has clearly worried Wall Street, given its track record of predicting recessions. |
| Back in April, the Financial Times wrote a handy feature on the inverted yield curve (full marks for prescience!). | Back in April, the Financial Times wrote a handy feature on the inverted yield curve (full marks for prescience!). |
| It’s online here, explaining how some experts don’t think it’s terribly reliable as a recession indicator today, while others think it could cause a recession. | It’s online here, explaining how some experts don’t think it’s terribly reliable as a recession indicator today, while others think it could cause a recession. |
| Here’s a flavour: | Here’s a flavour: |
| The yield curve is Wall Street’s original “fear gauge”, notching up a perfect predictive record before pretenders such as the Vix index were even glimmers in the eyes of financial engineers. | The yield curve is Wall Street’s original “fear gauge”, notching up a perfect predictive record before pretenders such as the Vix index were even glimmers in the eyes of financial engineers. |
| Typically, countries pay less to borrow for three months than five years, and less for five years than for a decade — after all, investors want some compensation for the gradual erosion of inflation, or the risk, albeit faint, that a government could renege on its debt. | Typically, countries pay less to borrow for three months than five years, and less for five years than for a decade — after all, investors want some compensation for the gradual erosion of inflation, or the risk, albeit faint, that a government could renege on its debt. |
| Plotted on a graph, the bond yields of various maturities form a “yield curve” that most of the time slopes gently upwards. But sometimes short-term yields rise above longer-term ones, an “inversion” of the usual shape of the curve that has been an uncannily accurate harbinger of recessions, preceding every downturn since the end of the second world war. | Plotted on a graph, the bond yields of various maturities form a “yield curve” that most of the time slopes gently upwards. But sometimes short-term yields rise above longer-term ones, an “inversion” of the usual shape of the curve that has been an uncannily accurate harbinger of recessions, preceding every downturn since the end of the second world war. |
| With both the US and UK 2-10 yield curves inverting today for the first time since 2008, here is our big read on the phenomenon - and why it is so unnerving. https://t.co/qf15YES7Ub pic.twitter.com/rbg2C6CEfP | With both the US and UK 2-10 yield curves inverting today for the first time since 2008, here is our big read on the phenomenon - and why it is so unnerving. https://t.co/qf15YES7Ub pic.twitter.com/rbg2C6CEfP |
| It’s worth remembering that an inverted yield curve doesn’t signal an immediate US recession – the downturn could be a year away. | |
| That would coincide with the next presidential election, potentially undermining Donald Trump’s re-election bid. | |
| Trump has frequently pointed to the stock market as evidence that he’s doing a good job (the Dow Jones soared by almost a third during his first year in office). | |
| So any downturn would alarm the White House, and perhaps intensify calls for US interest rates to be cut. | So any downturn would alarm the White House, and perhaps intensify calls for US interest rates to be cut. |
| Assuming yield curve inversion is calling a recession in 12-18 months - that would put it slap bang in time for the 2020 US election -- can see why Trump keen on rate cuts | Assuming yield curve inversion is calling a recession in 12-18 months - that would put it slap bang in time for the 2020 US election -- can see why Trump keen on rate cuts |
| The futures market is signalling a rough day on Wall Street, with the US benchmark stock indices called down at least 1.3% | The futures market is signalling a rough day on Wall Street, with the US benchmark stock indices called down at least 1.3% |
| That would wipe out Tuesday’s rally (sparked by relief that America is delaying some tariffs on Chinese-made electronics goods). | That would wipe out Tuesday’s rally (sparked by relief that America is delaying some tariffs on Chinese-made electronics goods). |
| Economics professor Paul Krugman argues that the slump in government bond yields contains an important message -- politicians can, and should, borrow more to fund investment. | Economics professor Paul Krugman argues that the slump in government bond yields contains an important message -- politicians can, and should, borrow more to fund investment. |
| As I wrote in yesterday's newsletter (to which you should subscribe!), amateurs talk about stocks, but professionals study bond markets. As of this morning the bond market is basically begging governments to borrow: the US 10-year real rate just 0.02 percent 1/ pic.twitter.com/e44SX8Rvu7 | As I wrote in yesterday's newsletter (to which you should subscribe!), amateurs talk about stocks, but professionals study bond markets. As of this morning the bond market is basically begging governments to borrow: the US 10-year real rate just 0.02 percent 1/ pic.twitter.com/e44SX8Rvu7 |
| These low, low rates are telling us several things: (a) private investment demand is really weak despite tax cuts (b) recession risks are pretty high (c) infrastructure! I mean, with borrowing virtually free, why not fix all those falling-down bridges? 2/ | These low, low rates are telling us several things: (a) private investment demand is really weak despite tax cuts (b) recession risks are pretty high (c) infrastructure! I mean, with borrowing virtually free, why not fix all those falling-down bridges? 2/ |
| But not going to happen. One of my better takes early on was that the Trump infrastructure thing was never going to happen; sure enough, "infrastructure week" became a punchline, and now isn't even that 3/ https://t.co/alnlqhyMBf | But not going to happen. One of my better takes early on was that the Trump infrastructure thing was never going to happen; sure enough, "infrastructure week" became a punchline, and now isn't even that 3/ https://t.co/alnlqhyMBf |
| Despite today’s market turmoil, the office rental chain WeWork has just announced plans to float on the US stock market. | |
| WeWork is a workplace start-up, which rents out co-working spaces to startups, freelancers and enterprises. At one stage it even offered free beer... which might help explain why it’s not made a profit yet, losing $2bn in 2018. | WeWork is a workplace start-up, which rents out co-working spaces to startups, freelancers and enterprises. At one stage it even offered free beer... which might help explain why it’s not made a profit yet, losing $2bn in 2018. |
| WeWork is hoping to raise around $3bn through an IPO. Earlier this year it was valued at an eye-watering $47bn by Softbank, its largest investor – or 26 times its earnings. | |
| With more than half a million members, WeWork is clearly popular. But such companies are vulnerable to an economic downturn, which would presumably push down the rent they can charge. | With more than half a million members, WeWork is clearly popular. But such companies are vulnerable to an economic downturn, which would presumably push down the rent they can charge. |
| The Financial Times editor, Lionel Barber, thinks this could signal the top of the market... | |
| Bond market yields invert in US and UK; loss-making WeWork files for IPO. People, this is feeling toppy | Bond market yields invert in US and UK; loss-making WeWork files for IPO. People, this is feeling toppy |
| Newsflash: Britain’s FTSE 100 index of top blue-chip companies has hit its lowest level since early June. | Newsflash: Britain’s FTSE 100 index of top blue-chip companies has hit its lowest level since early June. |
| The Footsie has shed 102 points to 7,148, its lowest level since 4 June. |