Wall Street drops as bond market stokes recession fears

NEW YORK: US stocks slipped on Wednesday, as investors reeling from rising trade tensions fled riskier assets for perceived safer havens, leading the bond market to price in a slide into recession.

US Treasury yields took another dramatic drop and the premium on three-month bill rates above 10-year note yields was at its most elevated levels since March 2007. This so-called inversion between the two maturities has preceded every US recession in the past 50 years.

The drop in yields also reflected a jump in expectations that the Federal Reserve would cut key borrowing costs three more times by year-end, with markets fully pricing in a reduction in September.

“Whether the US economy is strong enough to withstand the next phase of a trade war is giving people concern right now,” said Mike Loewengart, vice-president of investment strategy at E*trade Financial in New York.

“Then we add in what’s at the disposal of the US Federal Reserve, some begin to question whether that tool chest could be depleted much too quicker before we have even encountered a recession.” The central banks in New Zealand, India and Thailand on Wednesday cut rates amid fears that the trade war could hit global growth.

The concerns remerged ater President Donald Trump last week threatened to slap 10% levies on the rest of $300 billion of Chinese imports.

The interest-rate sensitive S&P 500 banks sub-sector slipped 3.26%. The broader financial index dropped 2.21%, the most among nine of the 11 major S&P sectors trading lower.

The energy sector shed 1.65% as oil prices slid more than 3% on demand concerns.

At 11:08am, the Dow Jones Industrial Average was down 283.91 points, or 1.09%, at 25,745.61, easing from a near 600 points drop.

The S&P 500 was down 20.19 points, or 0.70%, at 2,861.58 while the Nasdaq Composite was down 24.61 points, or 0.31%, at 7,808.66.

China’s offshore yuan dipped on Wednesday with the currency markets still on edge ater China’s central bank set its official reference rate at an 11-year low.

A partial recovery in the yuan on Tuesday and a soter rhetoric from the White House on trade had helped the S&P 500 and the Nasdaq break a six-day losing streak.

With the second-quarter earnings season winding down, about 73% of the 426 S&P 500 companies that have reported results so far have topped earnings estimates.

Walt Disney Co dropped 4.7% ater its quarterly earnings missed analysts’ forecast as the company invested heavily in its streaming platform and began folding in assets purchased from Twenty-first Century Fox.

CVS Health Corp rose 6.1% ater the drugstore chain posted profit above estimates, boosted by strong sales in the Aetna health insurance business it acquired last year and raised its full-year earnings forecast. Declining issues outnumbered advancers for a 2.31-to-1 ratio on the NYSE and for a 1.74-to-1 ratio on the Nasdaq.

The S&P index recorded three new 52-week highs and 29 new lows, while the Nasdaq recorded 21 new highs and 156 new lows.

Meanwhile, British 30-year government bonds led a slide in gilt yields to new record lows on Wednesday, joining a global rally in fixed income ater weak German industrial data and the Us-china trade conflict boosted demand for safe haven assets.

Thirty-year gilt yields broke past a previous low of 1.186% that had held since August 2016, when the Bank of England launched its last round of bond purchases, dropping as much as 11 basis points on the day to botom out at 1.081%.

“Looking forward, an increasing number of observers no longer expect the trade conflict to be resolved before the upcoming US elections in November 2020, and the risk of recession can only increase in such a situation,” Italy’s Unicredit wrote in a note to clients.

At 1452 GMT, the 30-year gilt yield stood at 1.12%, still down 7 basis points on the day and on track for its biggest daily decline in more than a month.

Ten-year gilt yields broke past a record low dating back to August 2016 on Monday, and hit a fresh record low of 0.432% on Wednesday, and were on track to close 5 basis points lower at 0.47%.

Twenty-year gilt yields fell below 1% for the first time on record.

For many British investors, even low-yielding government bonds are more attractive than sliding shares at a time when global risks as well as the chance of a disorderly Brexit on Oct. 31 shorten the odds of an economic downturn.