World stocks shrivel as trade truce doubts, economic woes gather
Deflating hopes of a swift resolution to the Sino-U.S. trade war knocked world stocks off three-week highs on Tuesday, while growing fears the U.S economy could be headed for recession sooner than expected weighed on the dollar.
The rapprochement between U.S. President Donald Trump and China’s Xi Jinping at the weekend G20 meeting had fired up markets on Monday. But the upbeat mood quickly dissipated on skepticism that Washington and Beijing can resolve deep-seated differences on trade in the agreed three-month negotiating window.
Adding to market woes, was an inversion of the short end of the U.S. yield curve which raised the specter of a possible U.S. recession.
Following declines on Asian bourses, where Japan’s Nikkei stock index closed
2.4 percent lower, the mood was somber in Europe with the wider blue chip index slipping 0.3 percent. Frankfurt’s DAX and Paris’ CAC 40 fell 0.6 percent while MSCI’s index of world stocks declined
“The initial relief rally was never going to last. Investors need more detail now in order for that risk on sentiment to survive,” said Jasper Lawler, head of research at London Capital Group. “So far that detail has not been coming through and investors have more questions than answers.”
There was confusion over when the
90-day period, during which the U.S. and China would hold off on imposing more tariffs, would start. A White House official said it started on Dec. 1, while earlier, White House economic adviser Larry Kudlow told reporters it would start on Jan. 1.
Moreover, none of the commitments that U.S. officials said had been given by China - including reducing its 40 percent tariffs on autos - were agreed to in writing and specifics had yet to be hammered out.
Meanwhile the U.S. yield curve focused investors’ minds. The curve between U.S. three-year and five-year and between two-year and five-year paper inverted on Monday - the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt.
Analysts expect the two-year, 10-year yield curve - seen as a predictor of a U.S. recession - to follow suit.
On Tuesday, the yield on benchmark
10-year Treasury notes was at 2.95 percent compared with its U.S. Monday close of
2.99 percent. And the spread between
10-year and two-year Treasury yields tightened to around 13 basis points - hitting its narrowest level since July 2007.
“The focus is now shifting to the inverted U.S. bond yield curve which has negative connotations, while implying the U.S. economy is heading towards what was only a few weeks ago an improbable economic slowdown,” said Stephen Innes, head of trading for APAC at Oanda.
“Now, even recessionary fear is starting to raise its ugly head.”
However, analysts said U.S. manufacturing data released on Monday pointed to a stronger economic outlook, with new orders a “key driver” in boosting activity.
Meanwhile oil prices extended gains, adding to Monday’s 4 percent surge as investors bet a key OPEC meeting on Thursday could deliver supply cuts.
U.S. crude and Brent crude added 1.6 percent to $53.82 and $62.7 per barrel respectively.