Published: Mon, August 19, 2019
Finance | By Kristine Clayton

Dow Plummets 800 Points As Recession Fears Continue To Rattle Markets

Dow Plummets 800 Points As Recession Fears Continue To Rattle Markets

Most concerning for USA investors was that the yield on the benchmark 10-year Treasury note fell below that for 2-year Treasurys, meaning investors are piling into longer-term investments as a haven against short-term risk.

Global growth woes have mounted in recent months, especially as a bruising trade war between the United States and China showed signs of dragging on in a blow to businesses and consumers.

All three major USA indexes closed down about 3 percentage points, with the blue-chip Dow posting its biggest one-day point drop since October after two-year Treasury yields surpassed those of 10-year bonds, which is considered a classic recession signal. Each of the last five times the two-year and 10-year Treasury yields have inverted, a recession has followed.

Losses were more modest in Shanghai and Hong Kong and shares in London and NY were on course to bounce back on Thursday. The curve inversion is considered a classic indicator of a looming recession.

The benchmark ASX 200 index closed 2.9 per cent lower at 6,408 on Thursday, a stunning retreat from its record high reached on July 30.

There's been a sign that people are more concerned about the fallout of the trade war between the USA and China, in which Donald Trump has played a key part.

In particular, low and even negative global interest rates and global economic uncertainties are driving investors worldwide to buy U.S. Treasury bonds, and all that buying pushes the yields down. We can also see how markets reacted here.

There's little evidence in USA economic data to suggest a recession is imminent, according to Goldman's Korapaty, who sees the 10-year yield returning to 1.75 per cent by year-end.

Asian markets were roiled by recession fears Thursday after Wall Street recorded its worst day of the year.

The Dow Jones Industrial Average .DJI fell 8.38 points, or 0.03%, to 25,471.04. he S&P 500 .SPX gained 1.73 points, or 0.06%, to 2,842.33 and the Nasdaq Composite .IXIC dropped 14.23 points, or 0.18%, to 7,759.71.

MSCI's world equity index was down 0.2%, attempting to steady after the previous day's 2% rout.

China on Wednesday posted its worst growth for industrial production in 17 years. At the same time, the debt markets did not bounce back with the stocks on the news of the tariff delay. Perhaps more importantly for investors, stocks usually continue to rise after a yield curve inversion.

"As we view the risk of further escalation as high, the risks to the global outlook are decidedly skewed to the downside", the investment bank's chief economist Chetan Ahya wrote.

The yield curve inversion also suggests that investors expect the Federal Reserve to keep cutting short-term interest rates in an effort to boost the economy, Rehling says.

The spread between the yields of three-month and 10-year notes also posed an inverted curve during the day, which reflected a wave of panic that rippled over the USA financial markets. Generally, the U.S. government pays out higher interest rates for long-term bonds than shorter ones.

The dollar recovered from early weakness against the safe-haven yen on the better-than-expected USA retail sales.

Global benchmark Brent crude LCOc1 fell $1.25 to settle at $58.23 a barrel. The Japanese yen strengthened 0.1% versus the greenback at 105.83 per dollar, having firmed 0.8% on Wednesday.

The dollar index.DXY was down at 97.862, the euro up at $1.1155 EUR=.

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