Recession fears hit Wall Street after grim China, German data

Oil partly reverses sharp gains in previous session

NEW YORK, Aug 14, (RTRS): Equity markets tanked and oil prices fell sharply on Wednesday after a closely watched bond indicator pointed to the growing risk of a US recession that was heightened by data showing Germany’s economy in contraction and China’s worsening.

Yields on two-year US Treasury notes rose above the 10-year yield for the first time since 2007, a metric known as an inversion that is widely seen as a classic recession signal.

A GDP report showing German output fell 0.1% in the second quarter from the previous three months coupled with Chinese industrial production rising at its weakest pace since 2002 added to investor fears of a global slowdown in growth.

Stocks on Wall Street fell more than 2%, as did Germany’s DAX index, while the price of West Texas Intermediate, the US crude benchmark, slumped almost 5%.

The yield on the benchmark 10-year US Treasury note fell below 1.6% to its lowest since September 2016.

The slide in equity and oil markets erased the previous session’s sharp gains after the United States moved to delay tariffs on some Chinese products.

MSCI’s gauge of global equity performance fell 1.74% and its emerging market index fell 0.52%. The FTSEurofirst 300 index of leading European shares slid 1.92%.

Negative interest rates from the European Central Bank and Bank of Japan are having an adverse effect on yields everywhere, including the United States, Arone said.

Gold rose 1% while the dollar index added 0.1% and the euro fell 0.24% to $1.1144. The Japanese yen strengthened 0.93% versus the greenback at 105.77 per dollar.

US West Texas Intermediate (WTI) crude futures dropped $2.68 to $54.42 a barrel, having gained 4% in the previous session, the most in just over a month.

US

Wall Street main indexes slid more than 2% on Wednesday, as a closely watched US bond market indicator pointed to a renewed risk of recession following poor economic data from Germany and China.

Yields on the two-year Treasury notes rose above the 10-year yield for the first time since 2007, a metric widely viewed as a classic recession signal.

The interest-rate sensitive bank index slipped 3.7% and the broader financial sector fell 3.0% in response.

The downbeat mood followed a rally in Wall Street’s main indexes on Tuesday thanks to the Trump administration’s decision to delay tariffs on some Chinese imports. At current levels, the benchmark S&P 500 is down 2.7% from the previous session’s high.

The CBOE Volatility index, also known as Wall Street’s “fear gauge, rose 4.08 points to 21.60.

At 11:07 am ET, the Dow Jones Industrial Average was down 557.26 points, or 2.12%, at 25,722.65, the S&P 500 was down 62.63 points, or 2.14%, at 2,863.69. The Nasdaq Composite was down 190.71 points, or 2.38%, at 7,825.65.

Ten of the 11 major S&P sectors were in the red, with the energy sector’s 3.4% drop leading the decliners.

Shares of Apple Inc were down 2.1% after boosting markets a day earlier with a 4% rise. Chipmakers were also down, with the Philadelphia chip index slumping 3%.

UK

London’s FTSE 100 tumbled to its lowest in more than two months on Wednesday after the yield curve on US and UK government bonds inverted for the first time since the global financial crisis, fuelling fears of a possible recession ahead.

The FTSE 100 index, which was already lower because of weak Chinese economic data, dropped 1.4% by 1326 GMT with losses across all sectors. The midcap index slipped 1.1%.

The yield on the 10-year gilt fell below the yield on the two-year gilt shortly after 1000 GMT for the first time since 2008, traditionally a sign that some investors think a recession is nearing.

An inverted yield curve means shortterm bonds pay more than long-term bonds.

That battered the FTSE 100, leaving it on course for a monthly fall of 5.7% – the steepest in four years.

Upbeat corporate earnings helped some individual stocks hold onto gains despite the generally morose mood.

Admiral jumped 5% after the insurer posted a bigger-than-expected rise in earnings, driven by more customers in its UK business.

Balfour Beatty jumped 8.2%, its biggest one-day rise in more than 4-1/2 years, after the infrastructure company reported a rise in underlying profit and raised its annual cash forecast.

Europe

European shares fell on Wednesday, as a shrinking German economy and weak industrial data from China stoked fears of a global slowdown, forcing investors to turn defensive and overshadowing a temporary US-China tariff truce.

The pan-European STOXX 600 index fell 0.2% by 0820 GMT, with banks weighing on the benchmark, while the defensive healthcare, utilities and telecom sectors outperformed.

US President Donald Trump’s administration delayed imposing a 10% tariff on certain Chinese products, including laptops and cell phones, beyond September on Tuesday, providing battered equity markets world-wide some relief.

However, weak industrial data from China and a contraction for exportreliant German economy in the second quarter was a reminder that the impact of the drawn out trade war between the United States and China is far from over.

“The German GDP numbers kicked off the day badly for European markets, outweighing the limited positive impact from the Trump tariff relief,” said Chris Beauchamp, chief market analyst at IG Group in London.

Asia

Asian shares were higher Wednesday after the US said it would hold off on tariffs on Chinese imports of mobile phones, toys and several other items typically on holiday shopping lists.

Japan’s Nikkei 225 added nearly 1.0% to finish at 20,655.13, while Australia’s S&P/ASX 200 rose 0.4% to 6,595.90. South Korea’s Kospi gained 0.7% to 1,939.25. Hong Kong’s Hang Seng rose 0.5% to 25,402.40. The Shanghai Composite edged up 0.6% to 2,814.38.

Also boosting investor sentiments were comments from China that the two sides held discussions on trade overnight and would talk again the next two weeks.

Chinese factory output, retail spending and investment weakened in July, suggesting the world’s second-largest economy faces downward pressure on growth.

Factory output rose 4.8% over a year earlier, a marked decline from June’s 6.3%. Retail sales growth slowed to 7.6% from the previous month’s 9.8%. Investment in real estate and other fixed assets also weakened.

Oil

Oil prices fell on Wednesday on weak global economic data and a rise in US crude inventories, almost erasing the previous session’s strong gains which followed the United States’ move to delay tariffs on some Chinese products.

Brent crude was down $1.81, or 3%, at $59.49 a barrel at 1323 GMT, after rising 4.7% on Tuesday, the biggest percentage gain in a day since December.

US West Texas Intermediate (WTI) crude futures were down $1.80, or 3.1%, at $55.30 a barrel, having risen 4% the previous session, the most in just over a month.

Profit taking after Tuesday’s gains also weighed on crude prices on Wednesday, analysts said.

“We do expect Brent to continue recovering to $65 per barrel in the coming months,” Commerzbank analyst Carsten Fritsch said.

“Oil demand in China and the United States is unlikely to weaken noticeably as a result of the trade conflict, though if this were to happen Saudi Arabia would further reduce its output.”

Benchmark crude prices surged on Tuesday after US President Donald Trump backed off his Sept 1 deadline for 10% tariffs on some products, affecting about half of the $300 billion target list of Chinese goods.

Data from industry group the American Petroleum Institute (API) showed US crude stocks unexpectedly rose last week.

Crude inventories increased by 3.7 million barrels to 443 million, compared with analyst expectations for a decrease of 2.8 million barrels, the API said.

Currencies

The Japanese yen jumped to the day’s high on Wednesday as the United States bond yield curve inverted for the first time since 2007 as investors, gripped by worries of a looming global recession, fled to the safety of perceived safe-haven assets.

An inversion of the US Treasury yield curve – when short-dated bond yields fall more than their longer-dated counterparts – is considered as a classic recession warning and the drop in bond yields sent a chill through global markets after concerns of a US-China trade dispute receded somewhat.

The yen, which was already trading stronger on the day, received a further boost and headed towards a near 1-1/2 year high versus the US dollar.

The Japanese currency strengthened to 106.12 versus the dollar, its highest on Wednesday, up 0.6% on the day.

Overnight, it had fallen to a one-week low after US President Donald Trump backed off his Sept 1 deadline for imposing 10% tariffs on remaining Chinese imports, delaying duties on cellphones, laptops and other consumer goods. The announcement came after renewed trade discussions between US and Chinese officials.

China’s offshore yuan gave up some of its earlier gains on Wednesday as weaker-than-expected economic data tempered the optimism generated by the US decision to delay tariffs.

The fall in the yuan and the rise in yen mirrored analysts’ views that the delay in tariffs, although encouraging, wasn’t even close to resolving the US-China trade war.

The offshore yuan had jumped to a one-week high against the dollar on Tuesday after the tariff delay, but it fell back 0.4% against the dollar to 7.0396, still more than seven to the dollar, the level it reached last week when the 10% tariffs were announced.

China fixed the onshore yuan at 7.03, “the only sign so far of China making any concessions” to the United States, said Esther Reichelt, an analyst at Commerzbank.

Elsewhere, major currencies were little changed. The dollar index, which is down around 1% since the start of August, was flat around 97.7 despite the yield curve inverting.

Same goes for the euro, which was flat at $1.1180 after first estimate of second-quarter eurozone gross domestic product showed growth in the euro area remained stable as quarter-on-quarter GDP rose 0.2% as expected.

Sterling was slightly higher against the dollar and the euro, last by 0.2% at $1.2087 and 92.49 pence versus the common currency , even though inflation in Britain was 2.1% in July, above Bank of England’s target.

However, current levels in sterling suggest investors aren’t willing to take the British currency away from the deep lows it reached last week.